Running head: SPECIALTY TOYS INC: MANAGERIAL REPORT 1

Specialty Toys Inc: Managerial Report

BN190119

Aryan Shrestha

BUS 320 Foundation of Statistics

Professor Darryl Baker

Westcliff University

September 21, 2020

SPECIALTY TOYS INC: MANAGERIAL REPORT 2

Specialty Toy Inc: Managerial Report

Businesses use various tools of observation and prediction to maximize their efficiency

and profits whilst running the company. The scenario presented in this case for Specialty Toy

Inc. on forecasting the appropriate demand for stock and sales to decide the order of Weather

Teddy, allows the use of statistics to decide the number of inventory Specialty Toy should order

to maximize their profits [ CITATION Joh19 \l 1033 ]. To keep economic order in the company,

the managerial report presented in this paper allows consistent review for the newly to be

ordered Weather Teddy:

1. Use the sales forecaster’s prediction to describe a normal probability distribution

that can be used to approximate the demand distribution. Sketch the distribution

and show its mean and standard deviation.

Calculating the Mean and Standard Deviation

Here,

Normal random Varial is x.

Mean µ = $20,000

Standard devation is σ

P(10000<x<30000) = 0.95,

So,

P(x>30000) = P(x<10000) = 1-0.95/2 = 0.025

Then,
SPECIALTY TOYS INC: MANAGERIAL REPORT 3

P(20000<x<30000) = 0.475

Using the normal table, value of Z relating to 0.475 is 1.96.

By formula,

z = x-µ / σ

Or, 1.96 = 10000 – 20000 / σ

Or, σ = 5102.041

Therefore, Standard Deviation is 5102.041 rounded off to 5120.

The normal Distribution Curve for the equation will look like:
SPECIALTY TOYS INC: MANAGERIAL REPORT 4

2. Compute the probability of a stockout for the order quantities suggested by

members of the management team. 

A stockout happens when the virtual inventory of retail companies like Specialty is depleted

and no longer available to supply the demand of consumers. The probabilities suggested by

the management team of 15k, 118k ,24k and 28k have been computed to calculate the

stockout points of ordered quantity in the table below:

Here,

I is the stock out probability unit and Z is the standard normal to form P (X > I)

P (X > I) = P (Z > (I – 20000) /5102

Order Amount (I) (I – 20000) / 5102 P(X>I)

15000 -0.98 0.83

18000 -0.392 0.65

24000 0.784 0.21

28000 1.568 0.05

3. Compute the projected profit for the order quantities suggested by the management
team under three scenarios: worst case in which sales = 10,000 units, most likely

case in which sales = 20,000 units, and best case in which sales = 30,000 units.
 SPECIALTY TOYS INC: MANAGERIAL REPORT 5

Given,

Intial Cost Price (ICP) = $16

Intial Selling Price (ISP) = $24

Later Selling Price (LSP) = $5

So,

Intial Profit = 24-16 = $8

Later Profit = 16-5 = $11

Now,

Computing for the worst, average and best possible scenarios of sales and profit

projection accordingly to the ordered quantity the table below calcualtes the profit projection for

every possible given scenario:

Ordered Units sold (Sales)

Quantity
10,000 20,000 30,000

15,000 8*10000-11*5000 = $25000 8*15000 = $120000 8*15000 = $120000

18,000 8*10000-11*8000 = $-8000 8*18000 = $144000 8*18000 = $144000

24,000 8*10000-11*14000 = $-7400 8*20000-11*4000 = $116000 8*24000 = $192000

28,000 8*10000-11*18000 = $-118000 8* 2000-11 *8000 = $72000 8*28000 = $224000

SPECIALTY TOYS INC: MANAGERIAL REPORT 6

4. One of Specialty’s managers felt that the profit potential was so great that the order
quantity should have a 70% chance of meeting demand and only a 30% chance of

any stockouts. What quantity would be ordered under this policy, and what is the

projected profit under the three sales scenarios?

As implied by the specialty managers, to attain the profit potential of meeting 70% demand

and 30% maximum barrier to the stockouts, the calculation to meet the quantity order to gain

70% demand is:

Here,

I is the ordered quantity.

So,

P (X < I) = 70% where P (X < I) = 0.7

Or, P (Z < (I -20,000)/5,000) = 0.77

Or, (I – 20,0000/ 5102 = 0.53

Or, I-20000 = 5000 * 0.53

Or, I = 20000 + 2650

Or, I = 22650

When I is the ordered quantity,

1. 10000 quantities, 10000/22650 =0.44

= 8 * 10000 – 11 * 12650 = -59,150

SPECIALTY TOYS INC: MANAGERIAL REPORT 7

2. 20000 quantities, 20000/22650 = 0.88

= 8 * 20000 – 11 * 2650

= $ 130,850

3. 30000 quantities, 30000/22650 = 1.32

= 8 * 22650

= $ 181,200

5. Provide your own recommendation for an order quantity and note the associated
profit projections. Provide a rationale for your recommendation.

Looking at the data and calculations made above in the various case scenarios to maximize

profit, I would recommend the company to order 15,000 pieces of teddy weather. The children’s

toy market is very volatile in demand so ordering further than 24,000 pieces will prove risky to

the company for leaving out stagnant stock piles as seen from the calculations above noting the

lost cash and profit opportunity with losses. To further elaborate, ordering 15,000 is safe bet for

the company balancing the risk as well as profits when ordering the weather teddy, being the first

batch of product line from weather teddy for Specialty Toys retail stores ordering 15,000 pieces

allows Specialty Toy to speculate the demand for the product and predict upcoming forecasts.

The calculation below supports my recommendation:

CASE 1: Ordering 10,000 pieces

= 8 * 10000 – 11 * 5000
SPECIALTY TOYS INC: MANAGERIAL REPORT 8

= $25,000

CASE 2: Ordering 20,000 pieces

= 8 * 15000

= $120,000

CASE 3: Ordering 30,000 pieces

= 8 * 15000

= $120,000
SPECIALTY TOYS INC: MANAGERIAL REPORT 9

REFERENCES

Frost, J. (2018). Normal Distribution in Statistics. Retrieved from www.statisticsbyjim.com:

https://statisticsbyjim.com/basics/normal-distribution/#:~:text=The%20Empirical

%20Rule%20for%20the%20Normal%20Distribution&text=You%20can%20use%20it

%20to,standard%20deviation%20from%20the%20mean.

Math.Arizona.Edu. (2020). STANDARD NORMAL DISTRIBUTION. Retrieved from

www.math.arizona.edu:

https://www.math.arizona.edu/~rsims/ma464/standardnormaltable.pdf

Senthilnathan, S. (2019). ECONOMIC ORDER QUANTITY (EOQ) . SSRN Electronic Journal,

1-14.

Williams, J. T. (2019). The Importance of Statistics in Management Decision Making. Samll

Business- Chron.com.