The Campus Bookstore Sells Highlighters That It Purchases by the Case

question 45

Essay

The campus bookstore sells highlighters that it purchases by the case. Cost per case, including shipping and handling, is $200. Revenue per case is $350. Any cases unsold will be discounted and sold at $175. The bookstore has estimated that demand will follow the pattern below
$$\begin{array} { | c | c | } \hline \text { Demand level } & \text { Probability } \\\hline 10 \text { cases } & 20 \text { percent } \\\hline 11 \text { cases } & 20 \text { percent } \\\hline 12 \text { cases } & 40 \text { percent } \\\hline 13 \text { cases } & 15 \text { percent } \\\hline 14 \text { cases } & 5 \text { percent } \\\hline\end{array}$$
a. Construct the bookstore's payoff table.
b. How many cases should the bookstore stock in order to maximize profit?
c. How would your answer differ if the clearance price were not $175 per case but $225 per case?
(It is not necessary to re-solve the problem to answer this.)

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Definitions:

Absorption Costing

An accounting method that includes all manufacturing costs, both fixed and variable, in the cost of a product, required for external reporting in many jurisdictions.

Ending Inventory

The total value of all unsold goods still available in stock at the end of an accounting period.

Absorption Costing

A calculation method in accounting that compiles all production-related costs, namely direct materials, direct labor, and every overhead cost (both variable and fixed), into the product's pricing.

Variable Costing

An accounting method that includes only variable production costs (direct materials, direct labor, and variable manufacturing overhead) in the cost of goods sold and treats fixed manufacturing overhead as an expense of the period.