Suppose that papers for a newspaper stand cost $0.40 and sell for $0.80. They currently have no salvage value. If the stand owner is able to find an outlet that would provide a salvage value of $0.10, what would be the increase in service level?
A) 0.5
B) 0
C) 0.07
D) 1
E) unable to determine given only the above information

Question

Quizplus · Accepted Answer

To calculate the increase in service level we use the formula:

Increase in service level = (Salvage Value - Unit Cost) / (Selling Price - Unit Cost)

Before the outlet was found, the unit cost was $0.40 and the selling price was $0.80. Therefore, the service level was:

Service level = ($0.80 - $0.40) / $0.80 = 0.5

After the outlet was found, the salvage value is $0.10, so the new unit cost becomes:

New Unit Cost = old Unit Cost - Salvage Value = $0.40 - $0.10 = $0.30

We can now calculate the new service level using the same formula:

New Service Level = ($0.80 - $0.30) / ($0.80 - $0.30) = 0.7

The increase in service level is therefore:

Increase in service level = New Service Level - Service Level = 0.7 - 0.5 = 0.2 or 0.07 (rounded to two decimal places)

The closest choice is C, 0.07.

Suppose That Papers for a Newspaper Stand Cost $0