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In our lecture we defined the Underage Cost (Cu) and the Overage Cost (Co). The ratio of Cu to (Cu + Co) is called the
In our lecture we defined the Underage Cost (Cu) and the Overage Cost (Co). The ratio of Cu to (Cu + Co) is called the Critical Ratio. How does the Critical Ratio help us to find the profit-maximizing order quantity in a Single-Period (Newsvendor) ordering situation? Group of answer choices We should choose the profit-maximizing order quantity, Q*, so that we don't have left over inventory (i.e., demand is Q or higher) with a probability that equals the Critical Ratio. We should choose the profit-maximizing order quantity, Q*, so that we don't have lost sales (i.e., demand is Q or lower) with a probability that equals the Critical Ratio. We should choose the profit-maximizing order quantity, Q*, so that it equals the critical ratio. We should choose the profit-maximizing order quantity, Q*, so that the service level in the season (i.e., probability that all demand is satisfied) is equal to 1 minus the Critical Ratio
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