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consider a product meeting the newsvendor assumptions. The unit purchase cost is $140. For each sold unit, you earn a profit of $60. For each leftover, you lose $30. The demand follows a normal distribution with a mean 80 and a standard deviation 30. Calculate the newsvendor critical ratio. what is the optimal order quantity

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Answer:

Newsvendor critical ratio = 0.35

Optimal quantity = 92.6 units

Explanation:

Cost = $140

Profit = $60

Loss =$30

Mean = 80

S.D = 30

Revenue = cost + profit

               = 140 +60

               = $200

Cost of under stock = revenue - cost

                                  = 200 - 140

                                  = $60

Cost of over stock = cost - salvage value

                               = 140 - 30

                                 = $110

The newsvendor critical ratio is calculated using the formula;

newsvendor critical ratio=

    Cost of under stock/Cost of under stock + Cost of over stock

Newsvendor critical ratio= 60/(60+ 110)

                                          = 60/170

                                          = 0.35

z = 0.3853

Optical quantity is given as;

Q = 80 + 0.3853* 30

   = 92.6 units

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