Question

Due to customer no-shows, the Inn at Charlotte hotel is considering implementing overbooking. The Inn at Charlotte has 150 rooms, and the full fare is $200. The forecast of no-shows is normally distributed with a mean of 10 and a standard deviation of 3. The Inn is sensitive about the quality of service, so it estimates that cost of failing to honor a reservation is $325 in lost goodwill and explicit expenses. What is the unit underage cost if the Inn underestimates the number of no-shows

Answer 1

The unit=9

Step-by-step explanation:

The Cost of underage Cu= price -cost =200-0 =200 ( as there is no variable cost of the unsold room)

Cost of overage Co= cost - salvage value = 0 -(-325) =325

Service level = Cu / Cu+Co = 200/ 325+200 = 0.3809

which corresponds to the z value of -0.3

the optimum overbooking = mean + z x SD

= 10+ 3 x (-0.3) =9