Calculate the expected cost per stockout with the following information: Probabi

Question

Calculate the expected cost per stockout with the following information: Probability of a back order is 50%, lost sale is 25%, and the probability of a lost customer is 25%. The cost per incident of a back order is $150, lost customer is $250,000. Sales price of the item is $1,500 with a 20% profit margin. The average order is 50.

None of the above

$250,000

$150

$15,000

$66,325

Need explain not just answers.

Thanks

None of the above

$250,000

$150

$15,000

$66,325

Need explain not just answers.

Thanks

Explanation / Answer

Back order cost = Probability*cost = .50*150

Customer lost cost = Probability*cost = .25*250000

Sales lost cost = sales price*margin*probability*order size = 1500*.20*.25*50

total cost = .50*150 + .25*250000 + 1500*.20*.25*50

= (75 + 62500 + 3750)

= 66325 $

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