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21 December, 19:31

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

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  1. 21 December, 19:57
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    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.
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