LOGISTICS ENGINEERING & SUPPLY CHAIN DESIGN

HOMEWORK 4 – SOLUTION

Question 1:
Consider a supply chain of a fashion item as below cost-benefit details:
F=$100,000 ; c=$55 ; w=$80 ; s=$20 ; p=$125.
a. Calculate the supply chain’s marginal profit.
b. Calculate the supply chain’s marginal loss.
c. Provided that the optimal policy is to produce 14,000 units, calculate the total expected
supply chain’s profit under this demand’s scenario:
Demand, Probability,
D (units) Prob
8,000 0.11
10,000 0.11
12,000 0.28
14,000 0.22
16,000 0.18
18,000 0.1

SOLUTION
a. The supply chain’s marginal profit is:
Supply chain’s marginal profit = p - c = 125 – 55 = $70

b. The supply chain’s marginal loss is:

Supply chain’s marginal loss = c – s = 55 – 20 = $35

c. Provided that the optimal policy is to produce 14,000 units, the expected supply
chain’s profit is:
𝑄 ≤ 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑝𝑄 − 𝑐𝑄
𝑄 > 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑝𝐷 − 𝑐𝑄 + 𝑠(𝑄 − 𝐷)

• With D = 8,000: Profit (D=8,000) = p*D – c*Q + s*(Q-D)

= 125*8,000 – 55*14,000 + 20*(14,000 – 8,000) = $350,000

• With D = 10,000: Profit (D=10,000) = p*D – c*Q + s*(Q-D)

= 125*10,000 – 55*14,000 + 20*(14,000 – 10,000) = $560,000

• With D = 12,000: Profit (D=12,000) = p*D – c*Q + s*(Q-D)

= 125*12,000 – 55*14,000 + 20*(14,000 – 12,000) = $770,000

• With D = 14,000: Profit (D=14,000) = p*D – c*Q

= 125*14,000 – 55*14,000 = $980,000

• With D = 16,000: Profit (D=16,000) = p*Q – c*Q

= 125*14,000 – 55*14,000 = $980,000

• With D = 18,000: Profit (D=16,000) = p*Q – c*Q

= 125*14,000 – 55*14,000 = $980,000

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 • Total expected profit of the supply chain = 350,000 * 0.11 + 560,000 * 0.11 + 770,000
* 0.28 + 980,000 * 0.22 + 980,000 * 0.18 + 980,000 * 0.10 – 100,000 = $705,700

Question 2:
Consider the following demand scenario for a 2-stage supply chain:
Demand Probability
2,000 26%
2,100 30%
2,200 29%
2,300 15%
Suppose the manufacturer produces at a cost of c=$20/unit and sells to the retailer at w=$40/
unit. Then, the retailer sells to end users for p=$50/unit during season, they will sell unsold
units for s=$10/unit after season.
a. Calculate the retailer’s marginal profit and loss.
b. Calculate the manufacturer’s marginal profit.
c. Provided that the order policy of the retailer is 2,200 units, then what is the expected
profit for the retailer?
d. Then, what is the expected profit for the manufacturer if the retailer concludes an order
of 2,200 units?
e. If the manufacturer reduces the wholesale price to the distributor to $35/ unit if the
retailer buys at least 2,100 units, what type of the contract is this?

SOLUTION
c=$20 ; w=$40 ; p=$50 ; s=$10

a. The retailer’s marginal profit is:

Retailer’s marginal profit = p – w = 50 – 40 = $10
The retailer’s marginal loss is:
Retailer’s marginal loss = w – s = 40 – 10 = $30

b. The manufacturer’s marginal profit:

Manufacturer’s marginal profit = w – c = 40 – 20 = $20

c. If Q=2,200 units, the expected profit for the retailer is:

𝑄 ≤ 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑝𝑄 − 𝑤𝑄
𝑄 > 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑝𝐷 − 𝑤𝑄 + 𝑠(𝑄 − 𝐷)

• With D = 2,000: Profit (D=2,000) = p*D – w*Q + s*(Q-D)

= 50*2,000 – 40*2,200 +10*(2,200 – 2,000) = $14,000

• With D = 2,100: Profit (D=2,100) = p*D – w*Q + s*(Q-D)

= 50*2,100 – 40*2,200 + 10*(2,200 – 2,100) = $18,000

• With D = 2,200: Profit (D=2,100) = p*D – w*Q

= 50*2,200 – 40*2,200 = $22,000

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• With D = 2,300: Profit (D=2,100) = p*Q – w*Q
= 50*2,200 – 40*2,200 = $22,000

• Total expected profit of the retailer = 14,000 * 0.26 + 18,000 * 0.30 + 22,000 * 0.29 +
22,000 * 0.15 = $18,720

d. If Q=2,200 units, the expected profit for the manufacturer is:

Total expected profit of the manufacturer
= (w – c)*Q = (40 – 20)*2,200 = $44,000

e. If the manufacturer reduces the wholesale price to the distributor to $35/ unit if the
retailer buys at least 2,100 units, this type of the contract is: Sales Rebate
contract/Typical contract