A Toy Company Designs a New Toy Car This Season

question 34

Essay

A toy company designs a new toy car this season. The fixed cost to produce the car is $120,000. The variable cost which includes raw materials, production, and shipping costs, is $40 per car. The company will sell the car for $48 each. A distributor has agreed to pay the toy company $12 for each car remaining after the retail selling season. Forecasts are for expected sales of 55,000 toy cars with a standard deviation of 9000. The normal probability distribution is assumed to be a good description of the demand. The management has tentatively decided to produce 55,000 units (the same as average demand), but it wants to conduct an analysis regarding this production quantity before finalizing the decision.
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a. Create a what-if spreadsheet model using formula that relate the values of production quantity, demand, sales, revenue from sales, amount of surplus, revenue from sales of surplus, total cost, and net profit. What is the profit corresponding to average demand (55,000 units)?
b. Modeling demand as a normal random variable with a mean of 55,000 and a standard deviation of 9000, simulate the sales of the toy car using a production quantity of 55,000 units. What is the estimate of the average profit associated with the production quantity of 55,000 cars? How does this compare to the profit corresponding to the average demand (as computed in part a)?
c. Before making a final decision on the production quantity, management wants an analysis of a more aggressive 65,000-unit production quantity and a more conservative 45,000-unit production quantity. Run your simulation with these two production quantities. What is the mean profit associated with each?

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