This will be solved using Newsvendor model Accordingly, Cu = Cost of underage =

Question

This will be solved using Newsvendor model

Accordingly,

Cu = Cost of underage = Price / unit – Cost/ unit = $2.25 - $0.75 = $1.5

Co = Cost of Overage = Cost / unit – Salvage value/ unit = $0.75 - $0.25 = $0.50

Therefore,

Critical ratio = Cu / ( Cu + Co) = 1.5/ ( 1.5 + 0.5) = 1.5/2 = 0.75

Critical ratio is the corresponding probability or service level

Therefore, Service level = 100 x Critical ratio = 75 %

SERVICE LEVEL = 75%

Z value corresponding to service level/ probability OF 0.75 = NORMSINV ( 0.75 ) = 0.67449

Number of sandwiches to be made each day to meet the service level

= Average daily demand + Zvalue x standard deviation of demand

= 61 + 0.67449 x 21

= 61 + 14.16

= 75.16 ( 76 rounding to next higher whole number )

NUMBER OF SANDWICHES TO BE MADE EACH DAY = 76

SERVICE LEVEL = 75%

Explanation / Answer

Problem 4: Single-Period Inventory System A local sub shop across town makes sandwiches every morning to sell to Verizon store employees and customers at lunch time. Sandwiches are sold to customers for $2.25 and cost $0.75 to make. It costs the sub shop s0.25 per sandwich to pick up any leftover sandwiches and dispose of them after lunch time. The average daily demand is 61 sandwiches with a standard deviation of 21 sandwiches. a) b) What is the target service level? How many sub sandwiches should be made each day to meet this service level?

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