Module 7

A store receives a low-margin consumable with a shelf life of only a few days after which the item discarded. Which of the following is TRUE?

everything else held equal, the merchant would prefer to understock rather than overstock

If a retailer purchases a certain item under the newsvendor model and the cost of overstocking and the cost of understocking are $180 and $290, respectively, what would be the optimal in-stock probability?

62%

Which of the following represents the cost of understocking?

lost net profit (per unit)

Everything else held equal, a decrease in the cost of overstocking is likely to ____.

increase the unit profit margin

A retailer estimated demand for the next year’s blue sweaters at 1,000 and a standard deviation of 100. The optimal in-stock probability is about 83% and the order quantity is 1,100. The retailer learns of an attractive offer from a re-seller should any overstocking occur. Consequently, the order quantity is expected to ______.

increase

Which of the following is correct regarding the optimal order quantity (Q*)?

Q* = Average expected demand + (Number of standard deviations * Standard deviation of demand)

In which of the following product applications would it be most appropriate to utilize the newsvender mode?

women’s fashion apparel.

If demand is _____, the newsvendor ________.

known; would order expected demand

Under the newsvendor model, when the manufacturer increases its prices ______. 

the retailer’s optimal order quantity is more likely to decrease

If a retailer purchases a certain item under the newsvendor model and the optimal in-stock probability is 93% - which is 1.48 standard deviations above the mean - what would be the optimal order quantity given that the average expected demand is 347 with a standard deviation of 41.8? (round up)

409

Which of the following statements is TRUE?

As the optimal in-stock probability increases, the optimal order quantity increases.

What is the special problem posed by the newsvendor model?

given uncertain, variable demand, the seller is likely to stock too many or too few with only a short time frame to sell the product at full cost.

When the transportation costs increase, the profit margin per unit __________.

decreases

Which of the following statements is TRUE?

if the producer/manufacturer reduces its prices to a retailer, the retailer’s profit margins increase.

In the newsvendor model, ordering the optimal in-stock probability will ___________.

minimize total cost

A merchant is planning how much of a high-margin product to purchase for a special event. Any product not sold can be used by the store later in a different product assortment. Which of the following is TRUE?

1. Everything else held equal, the merchant would prefer to overstock rather than understock.

2. Everything else held equal, the merchant would prefer to understock rather than overstock.

3. The newsvendor model may not be the best inventory decision tool for this application.

1 and 3

Everything else held equal for an optimal in-stock probability of 83%, an increase in the variation of average demand will mean ___________.

an increase in the optimal order quantity

__________ tends to increase the in-stock probability.

1. An increase in the cost of stocking out

2. A decrease in the cost of overstocking

both 1 and 2

Generally in the newsvendor model the optional order quantity will ______ when the producer's price _____.

increases; decreases

When the transportation costs increase, the profit margin per unit ___________.

decreases

A retailer estimated demand for next year's blue sweaters at 1,000 and a standard deviation of 100. The optimal in-stock probability is about 83% and the order quantity is 1,100. The retailer learns of an expected increase in transportation costs that will affect profit margin. Consequently, the order quantity is expected to _________.

decrease

In the newsvendor model, if the producer charges ______, the cost of overstocking goes _____ and the cost of understocking ______.

less; down; goes up

In which of the following product applications would it be least appropriate to utilize the newsvendor model?

letter-size paper

In the newsvendor model, what is a simple way to define the optimal in-stock probability (%)?

Cost of understock / (cost of overstock + cost of understock).