1) Suppose that papers for a newspaper stand cost $0.40 and sell for $0.80. They currently have no salvage value. If the stand owner is able to find an outlet that would provide a salvage value of $0.10, what would be the increase in service level? A).5 B) 0 C).07 D) 1 E) unable to determine given only the above information

C).07

Explanation:

Current cost of newspaper = C

= $0.40 / units

Current price of newspaper = P

= $0.80 / UNIT

Current salvage value = S = 0

Cost of under ordering = Cu

= P - C

= $40

Cost of over ordering = C - S

= $0.40

Critical ratio = Cu / (Cu + Co)

= 0.4 / (0.4 + 0.4)

= 0.5

Since critical ratio defines the probability of optimum demand,

We can consider service level (%) = Critical ratio x 100

Current service level = 50 %

When the salvage value = $0.1,

Cost of under ordering = Cu

= P - C

= $40

Cost of over ordering = C - S

= $0.40 - $0.1

= $0.30

Critical ratio = Cu / (Cu + Co)

= 0.4 / (0.4 + 0.3)

= 0.4/0. 7

= 0.5714

The revised service level = 0.5714 x 100 = 57.14 %

Therefore, The increase in service level is 0.07.