The buyer for Needless Markup, a famous “high-end” department store, must decide on the quantity of a high-priced woman’s handbag to procure in Italy for the following Christmas season. The unit cost of the handbag to the store is $28.50 and the handbag will sell for $150.00. Any handbags not sold by the end of the season are purchased by a discount firm for $20.00.(Show your calculation)
a) What are the underage cost and the overage cost?
b) What is the customer service level?
c) Suppose that the sales of the bags are expected to occur from 6 to 10 with equal probability of 0.08 each, from 11 to 15 with equal probability of 0.06 each, and from 16 to 23 with equal probability of 0.0375 each. How many bags should the buyer purchase?
d) Which level of safety stock would you suggest Billy’s to hold?
e) Assume the desired CSL is 0.95, what is the corresponding penalty cost?
f) Assume the store accountants estimate there is a cost of $0.40 for each unit tied up in inventory (which goes to the overage cost), as the associated dollar amount invested elsewhere could have yielded a gross profit. What is in your opinion the new value of the CSL?