Assume an organization's current service level on order fill is as follows: ?Current order fill 80%?Number of orders per year 5 000?Percentage of unfilled orders back-ordered 70% Percentage of unfilled orders cancelled 30% Back order costs per order $150?Lost pretax profit per cancelled order $12 500
a. What is the lost cash flow to the seller at this 80 percent service level?
b. What would be the resulting increase in cash flow if the seller improved order fill ?to 92 percent?
c. If the seller invested $2 million to produce this increased service level, would the ?investment be justified financially?