This problem will be solved using Newsvendor model. Given are : Unit price of tr
ID: 373421 • Letter: T
Question
This problem will be solved using Newsvendor model.
Given are :
Unit price of tree = P = $50
Unit cost of tree = C = $20
Unit salvage cost = S = o
Thus,
Underage cost = Cu = P – C = $50 - $20 = $30
Overage cost = Co = C -S = $20 – 0 = $20
Therefore ,
Critical ratio = Cu/( Cu + Co ) = 30/( 30 + 20) = 30/50 = 0.60
Critical ratio is the probability of the optimum quantity which will maximize profit
Hence, probability = 0.60
Corresponding Z value for probability of 0.6 = NORMSINV ( 0.6) = 0.2533
Hence, Optimum number of tress which should be stocked
= Mean demand + Zx Standard deviation of demand
= 100 + 0.2533 x 20
= 100 + 5.066
= 105.066 ( 105 rounded to nearest whole number )
THEY SHOULD STOCK 105 TREES
THEY SHOULD STOCK 105 TREES
Explanation / Answer
Question 6
A local club is selling Christmas trees and deciding how many to stock for the month of December. If monthly demand is normally distributed with a mean of 100 and standard deviation of 20, trees have no salvage value at the end of the month, trees cost $20, and trees sell for $50, how many trees should they stock?
95
100
105
112
120
A.95
B.100
C.105
D.112
E.120
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