R. Moore, Inc. assembles collections of records from the 1980s, secures release rights, and then mar
R. Moore, Inc. assembles collections of records from the 1980s, secures release rights, and then markets a double CD of approximately 44 songs through late-night infomercials. In the past, it has released several collections under such names as Ac€A?The Hair Band,Ac€?? Ac€A?Synth Guitars,Ac€?? and Ac€A?Shoulder Pads.Ac€?? From experience, it has found that, with proper marketing, demand for a double CD grows during the first three months of commercials, and then experiences a downward turn in the fourth month. By the fifth month, demand has usually fallen so low that continued production is unprofitable. Thus company policy is to produce the CD and sell it for four months for $19.95 each (plus $4.95 shipping and handling), and then move on to another project. Since the revenue per CD is fixed, R. Moore, Inc. concentrates on minimizing its expenses.
Forecasts of demand, unit manufacturing and advertising costs, and the maximum number of production runs (of 10,000 CDs each) for its latest project, Ac€A?IllinAc€?c Old School,Ac€?? are summarized in the following table.
Month – Forecasted Monthly Demand – Unit Production and Promotion Costs – Maximum Number of Production Runs
1 – 20,000 – $2.40 – 6
2 – 40,000 – $3.60 – 7
3 – 60,000 – $3.60 – 4
4 – 30,000 – $5.00 – 2
R. Moore pays $0.60 to store a double CD from one month to the next. Company policy restricts inventory to at most 30,000 double CDs so that if demand is overestimated during the production cycle, it will not be stuck with a large amount of unsold product.
Prepare a recommendation for an initial four-month production and inventory policy for R. Moore, Inc. for the Ac€A?IllinAc€?c Old SchoolAc€?? project.
