Fashion Buyers II A buyer for a department store must decide on which designs the stores will carry before he knows what the demand will be in the coming season. Choosing a poorly demanded design means lots of unsold merchandise and losses that are

Question

$200,000 on average. Passing on a highly demanded design means lots of unsold merchandise and missing out on profits that are $300,000 on average. So long as he is more than 40% confident that the design will be successful, carrying the design will minimize expected decision error costs. Why might he opt to carry designs only if he is more than, say, 50% confident of success?

Answer 1

The buyer is rewarded for making good decisions and has bonuses withheld when he makes bad decisions. Every time the store has to dispose of unsold merchandise, it is apparent that he made a bad decision. However, there may be instances where his supervisor is unaware that the buyer passed on what would have been a profitable design. These bad decisions go unnoticed. He will opt to avoid the errors that are noticeable even if it means committing more errors that go undetected.