Question

A retailer sells clothings. A stocking decision is needed during the peak season. He believes that the demand is normally distributed with mean 4000 and standard deviation of 300 clothings. The retail store purchases the clothing from the producer at $12 one clothing and sell it at $25. At the end, the store expects to return any unsold t-shirt to the producer at $4

1) Calculate the optimal service level for this stor

2) What is the optimal stocking decision?

3) How does your answer change if the store is not paid anything for any unsold clothing at the end of the selling season? Be specific if your answer either decreased on increased with explanation

Answer 1

The newsvendor model also called single-period model is nothing but the mathematical model which is used to determine the optimal quantity of perishable product that needs to maintained which is calculated based on fixed price and uncertain demand. Since the product is perishable and demand is uncertain the unsold items are worthless at the end of the day so newsvendor problem is solved to identify the optimal inventory level.