Question

You are the buyer for your university bookstore. One of the textbooks has a cost to you of $205 and you sell it to students for $410. In this case, however, you cannot salvage any value from copies that do not sell because a new edition is published every semester. Demand for this text averages 185 copies each semester, with a standard deviation of 31 copies. Use Appendix A.

How many should you order each semester? (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole number.)

Answer 1

Following details are provided :

Sale price of textbook = P = $410

Cost of textbook = C = $205

Salvage value = S = 0 ( because a new edition is published every year )

Average demand = m = 185 copies

Standard deviation of demand = Sd = 31 copies

Therefore ,

Underage cost = Cu = P – C = $410 - $205 = $205

Overage cost = Co = C – S = $205

Therefore , Critical ratio = Cu/ ( Cu + Co ) = 205/ ( 205 + 205) = 205/410 = 0.5

Critical ratio is the in stock probability of the optimum order quantity

Corresponding Z value for in stock probability of 0.5 will be = 0

Therefore ,

Quantity to be ordered each semester

= m + Zx Sd

= 185 + 0 x 31

= 185

NUMBER OF TEXTBOOKS TO BE ORDERED EACH SEMESTER = 185