The Newsvendor model helps us to decide what is the optimal (profit-maximizing) order quantity for an order decision taken before a given selling season. If there is not enough stock during the selling season, then we would lose a sale (Cu = p – c). After the selling season the remaining inventory from this first order would have to be sold at a much lower price – salvaged (Co = c – v). 1. Newsvendor Model Lesson The lesson of the newsvendor model was “don’t order the forecast!” Your profit-maximizing order quantity should take into account the overage (Co) and underage (Cu) costs. The critical ratio = Cu/(Cu + Co) gives you the in-stock probability. 1a. If Cu > Co, then your critical ratio will be greater than 0.5 à should you order more or less than the forecasted demand? Explain. 1b. If Cu < Co, then your critical ratio will be less than 0.5. à should you order more or less than the forecasted demand? Explain