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 Specialty Toys- Specialty Toys, Inc. sells a variety of new and innovative children’s toys.
Management learned that the preholiday season is the best time to introduce a new toy,
because many families use this time to look for new ideas for December holiday gifts. When
Specialty discovers a new toy with good market potential, it chooses an October market entry
date. In order to get toys in its stores by October, Specialty places one-time orders with its
manufacturers in June or July of each year. Demand for children’s toys can be highly volatile. If
a new toy catches on, a sense of shortage in the marketplace often increases the demand to
high levels and large profits can be realized. However, new toys can also flop, leaving Specialty
stuck with high levels of inventory that must be sold at reduced prices. The most important
question the company faces is deciding how many units of a new toy should be purchased to
meet anticipated sales demand. If too few are purchased, sales will be lost; if too many are
purchased, profits will be reduced because of low prices realized in clearance sales. For the
coming season, Specialty plans to introduce a new product called Weather Teddy. This variation
of a talking teddy bear is made by a company in Taiwan. When a child presses Teddy’s hand,
the bear begins to talk. A built-in barometer selects one of five responses that predict the
weather conditions. The responses range from “It looks to be a very nice day! Have fun” to “I
think it may rain today. Don’t forget your umbrella.” Tests with the product show that, even

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though it is not a perfect weather predictor, its predictions are surprisingly good. Several of

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Specialty’s managers claimed Teddy gave predictions of the weather that were as good as

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many local television weather forecasters. As with other products, Specialty faces the decision

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of how many Weather Teddy units to order for the upcoming holiday season. Members of the
management team suggested order quantities of 15,000, 18,000, 24,000, or 28,000 units. The

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wide range of order quantities indicates considerable disagreement concerning the market
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potential. The product management team asks you for an analysis of the stock-out probabilities
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for various order quantities, an estimate of the profit potential, and to help make an order
quantity recommendation. Specialty expects to sell Weather Teddy for $24 based on a cost of
$16 per unit. If inventory remains after the holiday season, Specialty will sell all surplus
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inventories for $5 per unit. After reviewing the sales history of similar products, Specialty’s
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senior forecaster predicted an expected demand of 20,000 units with a .95 probability that
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demand would be between 10,000 units and 30,000 units.

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
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standard deviation.
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2. Compute the probability of a stock-out for the order quantities suggested by members of the
management team

3. Compute the projected profit for the order quantities suggested by the management team
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under three scenarios: worst case in which sales = 10000 units, most likely case in which
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sales=20000 units and best case in which sales=30000 units

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 stock-outs. What
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quantity would be ordered under this policy and what is the projected profit under the three
sales scenarios?

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

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 Assumptions:

Let X be the demand for the toy. Then X follows normal distribution with mean μ = 20000 and
standard deviation σ. Then

P(10000 < X < 30000) = 0.95

P((10000-20000)/σ < (X-20000)/σ < (30000-20000)/σ) = 0.95
From tables of areas under the standard normal curve (30000-20000)/σ = 1.96
σ = (30000-20000)/1.96 =10000/1.96 = 5102

1. The demand distribution can be approximated by a normal distribution with mean µ =

20000 and standard deviation σ = 5102.

demand

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0 10000 20000 30000 40000 50000 60000
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2. Probability of stock out with an order of K units is P(X > K) = P(Z > (K-20000)/5102),
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where Z is distributed as standard normal

Order (K- P(X > K)

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(K) 20000)/5102
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15000 -0.98001 0.836458876

18000 -0.392 0.652472052
24000 0.784006 0.216518215
28000 1.568013 0.058439102
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3. The projected profit for the different

order quantities and scenarios are given in the following table.

Order Scenario 10000 Scenario 20000 Scenario 30000

1500 8*10000-11*5000 =25000 8*15000=120000 8*15000 =

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 0 120000
1800 8*10000-11*8000 8*18000 = 8*18000 =
0 = -8000 144000 144000
2400 8*10000-11*14000 8*20000-11*4000 8*24000 =
0 = -74000 =116000 192000
2800 8*10000-11*18000 8*20000-11*8000 8*28000 =
0 = -118000 =72000 224000

4. The order quantity to meet 70% demand is found by solving

P (X < K) =0.70
P (Z < (K-20000)/5102) = 0.70
(K-20000)/5102 = 0.5244
K = 20000 + 5102 * 0.5244 = 20000 + 2675 = 22675.

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5. Recommendation

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Based on our information, our recommendation for Specialty Toys, is to buy a unit

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quantity of 24,000.00 Weather Teddys.

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We are assuming a best case scenario, so if we sell 24,000 Weather Teddy, our revenue
would be $576,000, with a $ $192,000 profit.
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However with a more likely scenario of only selling 20,000 Weather Teddy we would only
gain a profit of 116,000 with a potential loss of losing $76,000 profit.
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Because these Teddys are pretty accurate we assume that the demand for this product
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will be high.
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