Bose is producingheadphones QC35. If Bose makes the headphones itself, the margin on the productis $200 and it costs $100 to produce theheadphones. Alternatively, Bose canhire a contractor to produce these headphones. Contractor's margin is $150,cost of production is the same as Bose's. Consider adecision on capacityinvestment (done by either Bose or a contractor). How do optimal service levelsthat Bose and contractor want to set relate to each other? (choosethe closestanswer)

1. Bose's service level is 20% higher than that of the contractor
2. Bose's service level is 10% lower than that of the contractor
3. Bose's service level is 30% higher than that of the contractor
4. Bose's service level is 20% lower than that of the contractor
5. Bose's service level is 30% lower than that of the contractor
6. Bose's service level is the same as the contractor's
7. Bose's service level is 10% higher than that of the contractor