#11 value: 1.00 points Conceptual Question 13-3 Consider two products... Conside
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value: 1.00 points Conceptual Question 13-3 Consider two products... Consider two products A and B that have identical cost, retail price and demand parameters and the same short selling season (the summer months from May through August). The newsvendor model is used to manage inventory for both products. Product A is to be discontinued at the end of the season this year, and the leftover inventory will be salvaged at 75% of the cost. Product B will be re-offered next summer, so any leftovers this year can be carried over to the next year while incurring a holding cost on each unit left over equal to 20% of the products cost. The quantity of each product is selected to maximize expected profit. How do those quantities compare? OThe quantity of product A is higher. °The quantity of product B is higher. °The quantities are equal. °The answer cannot be determined from the data provided.Explanation / Answer
Option B is right answer. The quantity of product B is higher.
Because the salvage value of Product A is 75% of its cost.The average cost(Co), is the difference between Product A’s cost and its salvage value, which is then 100% - 75% =25% of cost.
Product B’s overage cost is 20% of its cost.Both products have the same underage cost (Cu) so Product A has the higher average cost, which means it has the lower critical ratio,Cu/ (Co+Cu).Given that these products have the same demand distribution,Product A’s optimal order quantity must be lower, or, Product B’s stocking quantity is higher.
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