Consider the following newsvendor environment with sales seasonin August (school year start). We are now in late-April and thebest forecast for demand in August is that it is normallydistributed with a mean of 4000 units and a standard deviation of1000. We can buy now from a Chinese supplier at 6 $ per unit. Leadtime for this order is 3 months, so an order placed now will bedelivered before August. The item sells for 12 $ per unit.Inventory left over at end of August has to be discounted with asalvage value 2 $ per unit.
1.How many units do you buy now from China (only one order isplaced)? If the Chinese supplier’s variable cost per unit is 50cents, calculate the Chinese supplier’s profit for your orderquantity. Do you expect to make more or less profit than theChinese supplier? Explain.
2. Suppose in late June we will get to know the demand forAugust perfectly (our major customers place early orders); this isthe demand forecast update. In late June, we can buy from a quickerbut more expensive local supplier. The unit cost is 8 $ per unitand the lead time for orders is one month (so delivery is by lateJuly, before the August selling season). In this case, how manyunits do you buy now from the Chinese supplier (knowing you can buyagain later from the local supplier)? Explain your logic.
