Question

Your company prints a monthly magazine that is sold at bookstores around the company. you calculate the underage cost to be $5 per magazine and the overage cost is to be $1 per magazine. what is the target service level for this magazine?

Answer 1

The target service level for the magazine is 83.33%, calculated using the formula Target Service Level = Underage Cost / (Underage Cost + Overage Cost). This level reflects the desired balance between meeting customer demand and reducing overstock costs.

Step-by-step explanation:

The question asks what is the target service level for a magazine that has an underage cost of $5 and an overage cost of $1. The target service level can be found by using the formula:

Target Service Level = Underage Cost / (Underage Cost + Overage Cost)

In this case, it would be:

Target Service Level = $5 / ($5 + $1) = $5 / $6 = 0.8333, or 83.33%

This means the company aims to have a service level where the probability of not running out of stock (i.e., having an underage) is 83.33%. The target service level is an important concept in inventory management and helps ensure that customer demand is met while minimizing the costs related to overstocking.