The Newsvendor Problem describes a situation where a one-time purchase must be m
ID: 3256480 • Letter: T
Question
The Newsvendor Problem describes a situation where a one-time purchase must be made when demand for the product is uncertain. Overbuy and you are left with the cost of unsold product; underbuy and you fail to meet the level of demand that is available. What could be more realistic? Below is the algebraic relationship that can be used to calculate net profit:
net profit = R*min(D, Q) + S*max(0, Q-D) - C*Q
C = cost of a unit
R = sales price of a unit
Q= units purchased (decision variable)
D= units demanded in a period (assume always >0)
S = salvage value of an unsold unit
Categorize the following statements as true or false:
a) ...... If Q>D, then the formula above will have a contribution of Salvage Value that is greater than 0.
b) ...... If Q>D, then C*Q will be 0.
c) ...... If Q=D, then the term min(D, Q) will equal 0
Explanation / Answer
Answer to part a)
Yes this statement is true , is the Quantity purchased is more than demanded, then the left over units will have a salvage value which would be greater than 0. Salvage value is the resale value of a product , when the product's life is over.
.
Answer to part b)
If Q > D , that is if the quantity purchased is greater than that demanded , it doesnot imply that the cost would be Zero in any sitution. Thus this statement is FALSE
.
Answer to part c)
If Q= D , then the function min(D,Q) will result in the vlaue of Q or D. It will not be Zero.
Thus this statement is also FALSE
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