1. In order to decide how many units of an item it should stock, L.L. Bean first freezes its forecast for demand in the upcoming season. The company gets its demand forecast by taking a consensus between the people involved with the product, buyers, and inventory managers. Once the forecasted demand is frozen, L.L. Bean uses historical demand (mainly A/F ratio) and its forecast to analyze possible error. Forecast errors are calculated for each unique item. Then L.L. Bean uses a frequency distribution of the individual items – the critical ratio - that can be used as a probability distribution for future error. Next, L.L Bean calculated every item’s commitment quality by using the items individual contribution margin and its salvage value. The company would use the optimal stock and the frozen forecast to value an item. L.L. Bean considers both the contribution margin and the liquidation costs (for items purchased versus items not purchased).

2. There are a three different scenarios to decide relevant costs and revenues: stock kept for a sold item, excessive stock of an unsold item, and no stock for a demanded item. First, if stock is kept of a particular sold item, all costs related to buying and selling the product would be included. The costs that need to be included are the selling price, the buying cost, the carrying cost, and the marketing cost. Second, if excessive stock is unsold at the end of the season, there is a different set of relevant costs. In this instance, the costs that need to be included are the buying costs, the storage costs, the marketing costs, and the salvage costs of the item (unless there is no salvage cost, in which case we would use the redundancy cost). Third, if there is no stock for an item but there is demand, the cost of no stock is high because of its loss in goodwill. In this case, the loss of goodwill matters.

3. Scott