A local vendor of newspapers feels that dissatisfaction of customers leads to future lost sales. In fact,

Question:

A local vendor of newspapers feels that dissatisfaction of customers leads to future lost sales.

In fact, she feels that the average demand for a particular newspaper is related to the service level as follows:

xˆ = 1,000 + 500P where xˆ is the average demand in copies/period and P is the fraction of demand that is satisfied. Demands are normally distributed and the standard deviation (per period)

is equal to 200, independent of the service level. Other (possibly) relevant factors are:

Fixed cost per day to get any papers in = $2 Cost per paper (for vendor) = $0.07 Selling price per paper = $0.15 Salvage value per paper = $0.02

a. Ignoring the effect of disservice on demand, what is the best number of papers to acquire per period?

b. Taking account of the effect, now what is the best number to acquire?

c. What average profit is the vendor losing if she proceeds as in

(a) instead of as in (b)?? Lp852

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