Profitability evaluation for newsboy-type product with normally distributed demand

Abstract

This paper considered newsboy-type products with a normally distributed demand, and defined a product’s profitability as the probability of achieving the target profit under optimal ordering condition. In order to determine whether the product is already unworthy of being ordered (or manufactured) in a competitive market, we conducted a profitability evaluation which examines whether the profitability meets a designated requirement. As the parameters μ and σ are unknown, we introduced a new index (achievable capacity index; IA) which has a simple form expression of the product’s profitability, and found an unbiased and effective estimator of IA to estimate the actual IA. In addition, we utilised a statistical hypothesis testing methodology. The critical value of the test was calculated to determine the evaluation results. The sample size required for the designated power and confidence level was also investigated. An application example for a fresh food product was provided to illustrate the utilisation of the proposed approach.