Question

4. Which of the following statements regarding the Newsvendor model is TRUE?

a) The newsvendor model works well for regularly stocked items but not for perishable items

b) The in stock probability must be less than or equal to the critical ration for any possible order quantity

c) A critical ration of .7 means there is a 70% chance that demand is less than or equal to the optimal order quantity

d) If the critical ration is greater than 50%, the optimal order quantity should equal the mean of the demand distribution

Answer 1

Answer is Option C.

Since, the newsvendor model works well for the perishable items, so Option a) is false.

In the Newsvendor Model, if given uncertain and variable demand, then seller is likely to stock too few or too many with only a short time frame to sell the product at the full cost.

Option C is true as it represent the probability less than or equal to the critical.