A popular Cheap-Ticket flight from New York (LGA) to Dallas (DFW) costs $80. Fro

Question

A popular Cheap-Ticket flight from New York (LGA) to Dallas (DFW) costs $80. From the past history, the airline knows that an average of 20 customers (with standard deviation of 10) cancel their reservation. If the flight is overbooked, the airline has a policy to board customer on the next available flight and give the person a free round- trip ticket on a future flight. The cost of free round-trip flight averages $180. By how many should this 'Cheap-Ticket' airline should overbook the flight? P lessthanorequalto C_mu/C_0 +C_mu Z = x-mu/sigma

Explanation / Answer

Cost of underbooking = $80

Cost of overbooking = $180

Let qopt is the optimum quantity,

Service level = 80 / (80+180)

= 0.3076

Now find z value for the given service level using Normal distribution table.

Z = 0.51

qopt = mean + Z*SD

= 20 + 0.51*10

= 25.1 ~ 25

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