Question

The managerial R,Q model is called “managerial” because it should be used by managers. TRUE/FALSE

The newsvendor model does not consider ordering costs since it is assumed that the cost of placing an order is zero. TRUE/FALSE

In a newsvendor context, the cost of overstocking per unit can be computed as follows:

Purchase cost – sales price + disposal cost Order placement cost + inventory holding cost – stockout cost Disposal cost – salvage value + purchase cost Salvage value + sales price – purchase cost What is the objective of a newsvendor model? Maximize customer sales Minimize inventory levels Minimize the sum of the costs of over- and understocking Minimize the sum of ordering and holding costs

Answer 1

(1) The managerial RQ model is called as "Managerial" because with the help of the RQ model, the managerial decisions can be taken correctly as well as logically, regarding the stock levels and the cost associated with it. Not because it should be used by the managers only. Hence the answer is False.

(2) The newsvendor model makes the following assumptions such as that there exists one short selling season, there are no chances of re- supply in the short selling season, the goods can be procured only once at the beginning of the season and the costs as well as the demand distributions are known. There is no such assumption that the cost of placing the order is zero, and hence ordering costs are not considered. Hence the answer is False.

(3) In a newsvendor context the cost of overstocking per unit can be calculated using the formula Disposal cost- Salvage value+ Purchase cost. By following this the overall cost of the overstocking will reduce and the cost of unsold goods at the end of the season will be adjusted. Hence the answer is Disposal cost- Salvage value+ Purchase cost.

(4) The main objective of the newsvendor model is to balance out the cost of ordering too much as compared to the cost of ordering too little. Balancing both the cost of under stocking as well as over stocking is an important objective of the model. Hence the answer is Minimize the sum of the costs of over- and under stocking.