Problem 2. Hotel California The hotel has a bookstore, which buys business newsp

Question

Problem 2. Hotel California

The hotel has a bookstore, which buys business newspapers from a print house at $0.3 per copy and sells them at $0.5 per copy (Hint: that is the purchasing cost is $0.3 and the selling price is $0.5). Any extra unsold copies are returned to the print house for a half refund (Hint: that is the salvage value is $0.15). Demand for newspapers is uniformly distributed with minimum of 10 and maximum of 80.

a) How much is the underage cost, ?????

b) How much is the overage cost, ?????

c) What is the optimal service level?

d) How many newspapers should the bookstore order, ????

e) How many newspapers should the bookstore order if any extra unsold copies can be returned to the print house for a full refund (Hint: that is the salvage value is $0.3)?

Formula Sheet Cost of underage: Cu = Selling price-Purchasing cost Cost of overage: Co - Purchasing cost - Salvage value Optimal service level _ C. co + Cu If demand is uniformly distributed with minimum demand of Min and maximum demand of Max then optimal order Q* is: C. 0* = (Max-Min) + Min Co t cu

Explanation / Answer

a) Underage cost, Cu = Selling price - Purchasing cost = 0.5 - 0.3 = 0.2

b) Overage cost, Co = Purchasing cost - Salvage value = 0.3 - 0.15 = 0.15

c) Optimal service level = Cu/(Cu+Co) = 0.2/(0.2+0.15) = 0.5714

d) Optimal order quantity, Q* = 0.5714*(80-10) + 10 = 50

e) For a full refund, Co = 0.3 - 0.3 = 0

Optimal service level = 0.2/(0.2+0) = 1

Optimal order quantity = 1*(80-10)+10 = 80

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