The cost of 0.038 is added to book cost as it is the weekly interest of unsold c

Question

The cost of 0.038 is added to book cost as it is the weekly interest of unsold copies. Thus, every week, the cost of book increases and that needs to be factored in. the product cost. So, when Cost of excess and Cost of shortfall are determined by using formula, it will help to give realistic estiate of cost impact.

Cost = 9.95+0.038 = 9.998

Cost of shortage Cs = Price - cost = 19.95 - 9.998 = 9.952

Cost of excess, Ce = 9.998

SL = Cs/(Cs+Ce) = 0.50

Optimal = Mean + SL*deviation = 20 + 0.5*8 = 24

Explanation / Answer

Just Around the Corner is a small bookstore that sells mainly children’s books. Books are replenished weekly and copies of the books that are not sold at the end of a week are still kept on the shelves for future sales. Harry Potter Books sell for $19.95 and cost the bookstore $9.95 per book. Given that Barnes and Noble has a store one block away and if Just Around the Corner is out of stock, the customers go and buy a copy from Barnes and Noble. Weekly demand for the book has been approximated by a normal distribution with mean 20 and standard deviation 8. The owner uses an annual interest rate of 20 percent to determine its holding cost. How many copies of the book should be purchased at the beginning of each week?

the answer says that overage cost is 9.95*0.2/52=0.038.Why do not we add 9.95 to 0.038 ?

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