Question

1. Cycle inventory would increase if:

a. the annual demand for an item fell.

b. the cost of capital fell.

c. the cost to place an order fell.

d. the supplier had one price regardless of the quantity ordered.

2. In the newsvendor model, expected shortage per season

a. is the on-hand inventory minus the expected demand

b. decreases as the demand increases

c. is non-zero only when the expected demand is more than on-hand inventory

d. can be negative

e. none of the above

The answer should be B and E for these 2 questions but I don't know why. Could someone help me with them? Thank you!

Answer 1

Both your answers B and E are right.

1.. Cycle inventory would increase if:

a. the annual demand for an item fell.

b. the cost of capital fell.

c. the cost to place an order fell.

d. the supplier had one price regardless of the quantity ordered.

When the cost of Capital falls, the entrepreneur can employ more capital to the inventory and add a certain buffer stock levels to the same as well to meet the sudden demand. Hence Cycle inventory would increase.

2. In the newsvendor model, expected shortage per season

a. is the on-hand inventory minus the expected demand

b. decreases as the demand increases

c. is non-zero only when the expected demand is more than on-hand inventory

d. can be negative

e. none of the above

Irrespective of the lot size going up, the expected shortage per season is the number of units that shall still remain the same however, it is only in case of the safety inventory level going up that it may curb the expected shortage per season and could be in the case of variability. Expected shortage is Expected demand minus Expected sales and not concerning to the online inventory. It cannot be negative because those are measured in units. Hence none of the options are correct.