Chapter 13, Problem 8PA

Geoff Gullo owns a small firm that manufactures “Gullo Sunglasses.” He has the opportunity to sell a particular seasonal model to Land’s Start, a catalog retailer. Geoff offers Land’s Start two purchasing options.

• Option 1: Geoff offers to set his price at $65 and agrees to credit Land’s Start $53 for each unit Land’s Start returns to Geoff at the end of the season (because those units did not sell). Because styles change each year, there is essentially no value in the returned merchandise.
• Option 2: Geoff offers a price of $55 for each unit, but returns are no longer accepted. In this case, Land’s Start throws out unsold units at the end of the season.

This season’s demand for this model will be normally distributed with a mean of 200 and a standard deviation of 125. Land’s Start will sell those sunglasses for $100 each. Geoff’s unit production cost is $25.

1. a. How much would Land’s Start buy if it chose option 1? [LO13-1]
2. b. How much would Land’s Start buy if it chose option 2? [LO13-2]
3. c. Which option will Land’s Start choose? [LO13-2]
4. d. Suppose Land’s Start chooses option 1 and orders 275 units. What is Geoff Gullo’s expected profit? [LO13-2]