Question

1.In order to make reactive capacity useful in a selling season, which of the following is true?

Select one:

a. The unit cost of the second order must not be higher than that of the first order.

b. There is no opportunity for a second order in the selling season.

c. The optimal (profit-maximizing) first order size with reactive capacity must be larger than the optimal first order without reactive capacity.

d. The lead time of the second order is short compared to the duration of the entire selling season.

e. The optimal (profit-maximizing) first order with reactive capacity must be more expensive than the optimal first order without reactive capacity.

2.In a particular setting where the newsvendor model applies, demand is Normally distributed and the underage cost Cu can be calculated at 5, while the overage cost can be calculated as 10. This means that

Select one:

a. the expected profit-maximizing order quantity is more than expected demand.

b. the expected profit-maximizing order quantity is less than expected demand.

c. the expected profit-maximizing order quantity is exactly equal to expected demand.

d. From the given information, you do not know if the expected profit-maximizing order quantity is less than, equal to or greater than expected demand.

e. The critical ratio will be 0.5000.

Answer 1

Answer 1 – d. The lead time of the second order is short compared to the duration of the entire selling season.

In order to make reactive capacity useful in a selling season, the lead time of the second order must not be long because if it is longer than the selling season then regular capacity would be enough and there is no need to use reactive capacity. All other options are not necessary to make reactive capacity useful in a selling season.

Answer 2 - b. the expected profit-maximizing order quantity is less than expected demand.

The expected profit-maximizing order quantity is always less than the expected demand irrespective of demand distribution and critical ratio. The expected profit-maximizing order quantity can be exactly equal to expected demand only if there is unlimited quantity. The critical ratio with given underage cost Cu and the overage cost Co is 0.33. So, only option b is correct.