A publisher sells books to Borders at $12 each.

The marginal production cost for

the publisher is $1 per book. Borders prices the book at $24 and expects demand
to be normally distributed with a mean of 20,000 and a standard deviation of 5,000.
Borders places a single order with the publisher. Currently, Borders discounts any
unsold books down to $3 and any unsold books sell at this price.

(a) How many books should Borders order? What is their expected profit? How many
books do they expect to sell at a discount?
(b) What is the profit that the publisher makes given Borders' actions?

Buyback Contracts
Inputs
Mean Demand, Mu 20000
Standard Deviation of demand 5000
Borders' Cost, c = $ 12
Borders' Sale price, p = $ 24
Borders' Salvage value, s=b = $ 3
Publishers Cost, v $ 1
Publishers Sale price, c $ 12
Publishers buyback price, b $ -

Intermediate Calculations
Cost of Understocking, Cu $ 12
Cost of Overstocking, Co $ 9
Outputs
Order size, O* 20900
overstock 2477
understock 1577
Borders' Expected Profit $ 198,784
Publisher's E(Profit) $ 229,901
Total Supply Chain Profit = $ 428,685
 A publisher sells books to Borders at $12 each. The marginal production cost for the
publisher is $1 per book. Borders prices the book at $24 and expects demand to be
normally distributed with a mean of 20,000 and a standard deviation of 5,000. Borders places
a single order with the publisher. Currently, Borders discounts any unsold books down to $3
and any unsold books sell at this price.

(c) A plan under discussion is to refund Borders $5 per unsold book. As before Borders will
discount them to $3 and sell any that remain. Under this plan how many books will Borders
order? What is the expected profit for Borders? How many books are expected to be unsold?
What is the expected profit for the publisher? What should the publisher do?

Buyback Contracts
Inputs
Mean Demand, Mu 20000
Standard Deviation of demand 5000
Borders' Cost, c = $ 12
Borders' Sale price, p = $ 24
Borders' Salvage value, s=b = $ 8
Publishers Cost, v $ 1
Publishers Sale price, c $ 12
Publishers buyback price, b $ 5

Intermediate Calculations
Cost of Understocking, Cu $ 12
Cost of Overstocking, Co $ 4
Outputs
Borders' order size, O* 23372
Expected overstock 4118
Expected understock 746
Borders' Expected Profit $ 214,578
Publisher's E(Profit) $ 236,506
Total Supply Chain Profit = $ 451,084