Green Mountain Sports sells a full line of outdoor clothing and accessories, including waterproof hiking boots. Due to competition, Green mountain can sell these hiking boots for only $54 but must pay suppliers $40 per pair. One order is placed per season; excess inventory is sold at a 50% price discount at the end of the season. At $54, estimated demand over the season is 400 pairs of boots with standard deviation of 300. a. Given the prices and costs, how many waterproof hiking boots should Green Mountain order given its demand estimate? b. Suppose Green Mountain orders 380 pairs of boots? What would the fill rate be? c. Suppose Green Mountain orders 380 pairs of boots? What would the expected profit be? d. Suppose marketing is unhappy with the order quantity in part a? They argue that Green Mountain should maintain a high service level and insist that enough boots be ordered to have at least a 98% fill rate. What order size corresponds to a 98% fill rate for these boots?

MGMT 6010 Problem Set 3|Newsvendor and Revenue Management 1 Newsvendor Model 1.1 Green Mountain Sports Green Mountain Sports sells a full line of outdoor clothing and accessories, including waterproof hiking boots. Due to competition, Green mountain can sell these hiking boots for only $54 but must pay suppliers $40 per pair. One order is placed per season; excess inventory is sold at a 50% price discount at the end of the season. At $54, estimated demand over the season is 400 pairs of boots with standard deviation of 300. a. Given the prices and costs, how many waterproof hiking boots should Green Mountain order given its demand estimate? b. Suppose Green Mountain orders 380 pairs of boots? What would the ll rate be? c. Suppose Green Mountain orders 380 pairs of boots? What would the expected pro t be? d. Suppose marketing is unhappy with the order quantity in part a? They argue that Green Mountain should maintain a high service level and insist that enough boots be ordered to have at least a 98% ll rate. What order size corresponds to a 98% ll rate for these boots? e. What is Green Mountain’s expected pro t if it orders the amount calculated in part d? f. The supplier has o?ered Green Mountain a 10% discount if it orders at least 800 pairs of boots. If the objective is to maximize pro t, how many boots should Green Mountain order in light of this new information? g. Billy Bragg, marketing analyst, has decided to use A/F ratios for ordering decisions. Billy is trying to determine the order size for a di?erent product, the standard hiking boot. A pair of standard boot sells for $55 and, due to a competitive supplier market, can be purchased for $30. The boots do not go out of style, but do cost $2.50 to hold a pair over from one season to the next. Green Mountain anticipates that the $55 price and $30 cost will remain the same for the next season. Bragg collected data from 20 items that he felt had market behavior similar to the standard boot. His forecast…

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