In the single-period model, if excess cost is double shortage cost, the approximate stockout risk, assuming an optimum service level, is ___ percent.
A)100
B)67
C)50
D)33
E)5

Question

Quizplus · Accepted Answer

If excess cost is double the shortage cost, then we should set the service level to be twice the stockout risk.

For example, if the shortage cost is $1 and the excess cost is $2, then we should set our service level at 66.7% (i.e. we want a 33.3% stockout risk) in order to balance the costs.

Therefore, we can assume an optimum service level of approximately 66.7%, which corresponds to a stockout risk of 33.3%. The closest choice is B, which represents a 67% stockout risk.

In the Single-Period Model, If Excess Cost Is Double Shortage