Question

Corin sells Sunday papers outside a retirement home on Sunday mornings. Corin collects $2.89 per paper and pays $1.23 for a paper. The retirement home residents think fondly of Corin and aren’t too upset when papers run out. On the other hand, any papers Corin is left with are thrown into the recycling bin. Corin is trying to figure out a systematic ordering policy. When Corin runs out of papers, the sale is lost. Calculate the service level. (two decimal places, 0.00)

Answer 1

Solution:

Overage cost (Co) i.e. cost of overbuying is calculated as,

Co = Cost price - Salvage value

Since, the remaining papers are thrown into the recycling bin, Salvage value = $0

Co = $1.23 - $0

Co = $1.23

Underage cost (Cu) i.e. cost of underbuying is calculated as,

Cu = Selling price - Cost price

Cu = $2.89 - $1.23

Cu = $1.66

Service level = Cu / (Cu + Co)

Service level = $1.66 / ($1.66 + $1.23)

Service level = $1.66 / $2.89

Service level = 0.57