Question

1) Consider two products A and B that have identical cost, retail price and demand parameters and the same short selling season (the summer months from May through August). The newsvendor model is used to manage inventory for both products. Product A is to be discontinued at the end of the season this year, and the leftovers will be salvaged at 75% of the cost. Product B will be re-offered next summer, so any leftovers this year can be carried over to the next year while incurring a holding cost on each unit left over equal to 20% of the product's cost. How do the stocking quantities for these products compare?

a) Stocking quantity of product A is higher.

b) Stocking quantity of product B is higher.

c) Stocking quantities are equal.

d) The answer cannot be determined from the data provided.

Answer 1

b Stocking quantity of product B is higher.

Overage cost of product A (Coa)= Cost - salvage value = 100 - 75 = 25%

Overage cost of product B (Cob)= 20%

=>Products A, B have same underage(Cu) cost but have different overage costs.

critical ratio( Cu/(Co + Cu) ) of A & B are Cu/(25 + Cu) and Cu/(20 + Cu)

Comparing critical ratios of A & B, A has a lower critical ratio(as it has higher denominator)

=> product A's optimal order quantity is low and Stocking quantity of product B is higher.