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For a given newsvendor product, the unit purchase cost is $2 and the unit sales price is $4. At the end of the selling season, any leftover units are sold at a deeply discounted price of $1. Which of the following statements will be true?
I. The cost of overstocking per unit is $2
II. The cost of understocking per unit is $2
III. The optimal in-stock probability is about 67%
IV. The optimal newsvendor quantity will be lower than the average demand
a. Only statements I and II are correct.
b. Only statements II and III are correct.
c. Only statements III and IV are correct.
d. Only statements I and IV are correct

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Answer:

B) Only statements II and III are correct.

  • II. The cost of understocking per unit is $2
  • III. The optimal in-stock probability is about 67%

Explanation:

The cost of understocking is the amount of money lost for each our of stock product = selling price - unit cost = $4 - $2 = $2

The optimal in-stock probability = cost of understocking / (cost of overstocking + cost of understocking) = $2 / ($1 + $2) = $2 / $3 = 0.667 = 67%

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