HW #4 (25 pts; Due by Dec. 06)
Problem 1 (10 point): This exercise is designed to help you understand various forms of supply contracts. The spreadsheet file contains all the lengthy calculations. You are expected to know how to use the worksheets to determine the contract parameters by completing the following two exercises: * Buy-back Contract (1) Change the buy-back price and see how the retailer’s ordering decision will change by completing the following table. Do you see any trend? Manufacturer’s Buy-back Price | Retailer’s Optimal Order Quantity | Retailer’s Optimal Expected Profit | Manufacturer’s Expected Profit | $45 | 14000 | 497200 | 488500 | $50 | 14000 | 505500 | 480200 | $55 | 14000 | 513800 | 471900 | $60 | 14000 | 522100 | 463600 | $65 | 16000 | 534000 | 480500 |
The profit would decrease as the buy-back price increases when the order quantity is fixed, and the quantity would increase until maximum one when buy-back price increase to some levels.
(2) Suppose you are the manufacturer (seller), and you would like to induce the buyer by using this contract to purchase the maximum quantity; that is, 18,000 units. What would be the buy-back price you should offer to the buyer? Would this decision make sense?
When the buy-back price is more than or equal to $75, the buyer would purchase 18,000 units because the buyer could receive the largest profit in 18,000 units compared with other quantities.
This decision doesn’t make sense, because the manufacture should focus on the profit, and his goal is to maximize the profit. From the trend analyzed above, the profit would decrease as the buy-back price increases when the order quantity is fixed, so to induce the buyer to purchase the