Question

A retailer needs to find out the best order size for the coming season. The retail price is $12 per unit of sold product. The ordering cost for each unit is $4. The savage value of each unsold product is $2. The retailer estimates the future demand will be random variable which follows a normal distribution with mean=1000 and standard deviation=100.

What is the retailer’s best order size decision? (10 points) (you don’t need to find the exact value but need to show all steps to find this value, including excel functions needed)

Bonus question: How can you measure the risk in the retailer’s net

Answer 1

1)

Underage cost, Cu = p-c = 12-4 = $ 8

Overage Cost, Co = c-v = 4-2 = $ 2

Critical ratio = Cu/(Cu+Co) = 8/(8+2) = 0.8

Corresponding to critical ratio of 0.8, z Value =NORMSINV(0.8) = 0.8416

Retailer's beat offer size = mean Demand + z * std dev of Demand

= 1000+0.8416*100

= 1084 units