Question

A local club is selling Christmas trees and deciding how many to stock for the month of December. Demand is normally distributed with a mean of 100 and standard deviation of 20. Trees have no salvage value at the end of the month. Trees cost $10 each and sell for $40 each. What should the service level be

Answer 1

The service level would be of 0.75

Step-by-step explanation:

According to the given data we have the following:

Mean demand, μ = 100

Standard deviation, σ = 20

Purchase price = $10

Selling price = $40

Salvage value = $0

Hence, Cost of under-ordering, Cu = $40 - $10 =$30

Cost of over-ordering, Co = $10 - $0 =$10

Therefore, the calculation of The optimal service level is calculated as follows:

Service level = Cu / (Cu + Co)

Service level = $30 / ($30 + $10)

Service level = $30 / $40

Service level = 0.75

The service level would be of 0.75