George sells Sunday papers outside a retirement home on Sunday mornings. George collects $1.75 per paper and pays $.98 for a paper. The retirement home residents think fondly of George and aren’t too upset when papers run out. On the other hand, any papers George is left with are thrown into the recycling bin. When George runs out of papers, the sale is lost.
1. What is George’s critical ratio for this situation?
2. George wants to improve his system, so he finds a second source ("reactive capacity"). When George runs out of a paper, he procures it from town at $1.50 per paper. Which statement is correct?
a. The critical ratio will be higher due to the higher cost to reorder from the second source compared to the first order ($1.50 vs. $0.98), leading to a higher first-order quantity.
b. The critical ratio will be lower due to the higher cost to reorder from the second source compared to the first order ($1.50 vs. $0.98), leading to a lower first-order quantity.
c. The critical ratio will be higher due to the premium needed to order from the second source compared to the first order ($1.50 − $0.98 = $0.52), leading to a higher first-order quantity.
d. The critical ratio will be lower due to the premium needed to order from the second source compared to the first order ($1.50 − $0.98 = $0.52), leading to a lower first-order quantity.