The Newsvendor model helps us to decide what is the optimal (profit-maximizing) order quantity for an order decision taken before a given selling season. If there is not enough stock during the selling season, then we would lose a sale (Cu = p – c). After the selling season the remaining inventory from this first order would have to be sold at a much lower price – salvaged (Co = c – v).

1. Newsvendor Model Lesson The lesson of the newsvendor model was “don’t order the forecast!” Your profit-maximizing order quantity should take into account the overage (Co) and underage (Cu) costs. The critical ratio = Cu/(Cu + Co) gives you the in-stock probability.

1a. If Cu > Co, then your critical ratio will be greater than 0.5 a? should you order more or less than the forecasted demand? Explain.

1b. If Cu < Co, then your critical ratio will be less than 0.5. a? should you order more or less than the forecasted demand? Explain. 2. Books End, a bookstore on James St. in Syracuse, NY, is trying to decide on how many copies of the book, Fun with Operations Management to purchase at the start of the upcoming selling season (fall semester at Syracuse University). The book retails at $28.00. The publisher sells the book to Books End at $20.00. Books End will dispose of all of the unsold copies of the book at 50% off the retail price, at the end of the season. Books End estimates that demand for this book during the season is Normal with a mean of 1000 and a standard deviation of 250.

2a. What is the Underage (Cu) and Overage (Co) cost for Books End in this situation? Cu = p – c Co = c – v Select one:

a) Cu = $8, Co = $20

b) Cu = $8, Co = $6

c) Cu = $8, Co = $10

d) Cu = $28, Co = $20

2b. Suppose Books End wants to maximize his expected profits from the sale of this book. How many copies should he order from the publisher?