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23 December, 22:18

A local club is selling Christmas trees and deciding how many to stock for the month of December. 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 $10 each and sell for $40 each. What should the service level be

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  1. 23 December, 23:01
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    The service level would be of 0.75

    Explanation:

    According to the given data we have the following:

    Mean demand, μ = 100

    Standard deviation, σ = 20

    Purchase price = $10

    Selling price = $40

    Salvage value = $0

    Hence, Cost of under-ordering, Cu = $40 - $10 = $30

    Cost of over-ordering, Co = $10 - $0 = $10

    Therefore, the calculation of The optimal service level is calculated as follows:

    Service level = Cu / (Cu + Co)

    Service level = $30 / ($30 + $10)

    Service level = $30 / $40

    Service level = 0.75

    The service level would be of 0.75
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