Scientific Glass (SG) needs to make a one-time-ordering for its product called 5

Question

Scientific Glass (SG) needs to make a one-time-ordering for its product called 500-mL Beaker. The newsvendor model for Single Order Purchasing seems to be applicable here. The cost of underage for the product is $0.48, while the cost of overage is $0.021. The demand for the product approximately follows a normal distribution, with a mean of 650 units and a standard deviation of 62.5 units. As such, the optimal service level (in-stock probability) for this product would be

a. 92.0%

b. 94.6%

c. 95.8%

d. 98.0%

e. 99.8%

Explanation / Answer

Underage cost (Cu) = $0.48

Overage cost (Co) = $0.021

Optimal service level = Cu/(Cu + Co)

= 0.48 / (0.48+0.021)

= 0.48/0.501

= 0.958

= 95.8%

So the answer is option c

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