Homework Answers
The Excess cost is:
Co = Cost of excess inventory (overestimation) = Unit cost – Salvage Value = $1 – $0.6 = $0.4
The shortage cost:
Cu = Cost of stock-out (underestimation) = Selling price – unit cost = $2 -$1 = $1
Therefore,
Optimum Service level = Cu / (Cu + Co)
= $1 / ($1 + $0.4)
= $1 / $1.4
= 0.7143 or 71.43%
The Optimum Service level is 71.43%
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