Assume the following when determining the right stock level for snowshoes. 1) As

Question

Assume the following when determining the right stock level for snowshoes.
1) Assume weekly demand is normally distributed with mean 9 and standard deviation 3.
2) There are 26 rental opportunities in a season. Snow shoes are rented for $40
3) The average lifespan of snowshoes is 5 years
4) REI charges a 67% markup, meaning the $200 retail price implies that the purchase price for REI is 200/1.67 = $1.20

What is the cost of having a pair of snow shoes go unrented for a weekend of their useful life? (Think overage)

A) $4.82

B) $0.82

C) $0.92

D) $9.92

What is the "cost" of not having a snowshoe that someone can rent (ignore that the person might instead buy a snowshoe and just focus on lost rental revenue).

A) $44

B) $32

C) $40

D) $120

What is the profit-maximizing service level for rental snowshoes?

A) .911

B) .879

C) .978

D) .789

How many rental snowshoes should they stock?

A) 10

B) 17

C) 15

D) 13

Explanation / Answer

Retail price = $ 200

MArkup = 67 %

Therefore, purchase cost = 200/1.67 = $ 120

Life span = 5 years * 26 weeks = 130 per week

Cost per week = $ 120 / 130 weeks = $ 0.92

1. C) $ 0.92

Overage cost, Co = cost per week = $ 0.92

2. C) $ 40

Underage cost, Cu = Opportunity lost to earn a rental of $ 40 = $ 40

3. C) 0.978

Profit maximizing service level = Cu/(Cu+Co) = 40/(40+0.92) = 0.978

4. C) 15

For service level of 0.978, z = NORMSINV(0.978) = 2

Number of snowshoes they should stock = mean demand + z * std dev of demand = 9 + 2*3 = 15

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