As the standard deviation of forecast error increases,
A)expected profit increases and expected understock increases.
B)expected profit increases and expected understock decreases.
C)expected profit decreases and expected understock increases.
D)expected profit decreases and expected understock decreases.

Question

Quizplus · Accepted Answer

As the standard deviation of forecast error increases, it means that the forecast is becoming less accurate. In this case, if the company orders as per the forecast, there is a higher chance of overstocking or understocking. As a result, the expected profit decreases due to increased storage and holding costs, and the expected understock increases due to the higher probability of stockouts.

As the Standard Deviation of Forecast Error Increases