A plan under discussion is for the studio to refund Blockbuster $3 per DVD that does not sell during the one-month period. As before, Blockbuster will discount them to $4 and sell any that remain.
a. Under this plan, how many DVDs should Blockbuster order?
b. What is the expected profit for Blockbuster?
c. What is the expected profit for the studio?
A second plan under discussion is a revenue-sharing contract. The studio will set the wholesale price at $6.75 in return for 20% of the sales revenue. As before, any unsold DVDs are discounted by Blockbuster to $4, and all sell at this price.
d. Under this plan, how many DVDs should Blockbuster order?
e. What is the expected profit for Blockbuster?
f. What is the expected profit for the studio?
g. Which contract should the studio choose: Refund, or Revenue Sharing? Explain.