Direct Air operates a 200 seat jet from Toledo to Myrtle Beach, SC once a week. Cancellation distribution is normal with mean 10 and s.d. 2. A vacant seat in the jet is considered to cost $200 for the airline. An overbooked passenger, who has to be turned away, costs $300 to the airline.
What is the cost of excess (in the context of single period inventory management)?
What is the cost of shortage (in the context of single period inventory management)?
What is the appropriate ratio to determine the correct number of seats to be overbooked?
What should be the number of seats overbooked?
Suppose that the s.d. of cancellations is 0.1, (rounding it to the nearest integer), all other things remaining the same, how many seats would you overbook? Explain your answer using your understanding of normal distribution and low s.d.