Question

In a single-period model, if shortage cost is four times excess cost, then the optimum service level is ___ percent.

Answer 1

Answer:

80%

Explanation:

In the question it is given that the shortage cost is 4 times the excess cost

So shortage cost =4 excess cost

The critical ratio or optimum service level is given by

$C=\frac{shortage\ cost}{shortage\ cost+excess\ cost}$

So $C=\frac{shortage\ cost}{shortage\ cost+0.25\ shortage cost}=\frac{1}{1.25}=0.8$ =80%

So the optimum service level will be 80 %