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5. A movie studio sells a movie on DVD to VideosRUs at $10 per DVD. The marginal production cost for the movie studio is $1 p

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Answer #1

For videos RUs

Selling price(SP) = $19.99

Cost price (CP) = $10

Salvage value(V) = $4.99

Average demand (d) = 10000 DVDs

Standard deviation of demand (\sigmad) = 5000 DVDs

a) Overage cost(Co) = CP - V = $10-$4.99= $5.01

Underage cost(Cu) = SP-CP = $19.99-$10 = $9.99

Service level = Cu/(Co + Cu) = 9.99/(5.01+9.99) = 9.99/15 = 0.666 = 66.6%

So the optimal cycle service level is 66.6%

b) At 66.6% service level value of Z = 0.43

optimal order quantity = d + Z x \sigmad

= 10000 + 0.43 x 5000

= 10000 + 2150

= 12150 DVDs

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