Question

A company uses the newsvendor model to manage its inventories and faces normally distributed demand with a coefficient of variation of 0.75. The company decides to order a quantity that exactly equals the mean of its demand forecast.
Which of the following is true regarding this company’s performance measures?

a. There is a 0.50 probability that there is enough inventories to serve all demand.
b. The expected inventory equals 50% of the mean of the demand forecast.
c. The stockout probability is 25%.

Answer 1

Answer:

a. There is a 0.50 probability that there is enough inventories to serve all demand

Explanation:

There is a 0.50 probability that there is enough inventory to serve all demand because if the company uses the newsvendor model to manage its inventories and faces normally distributed demand with a coefficient of variation of 0.75 in which the company decides to order a quantity that exactly equals the mean of its demand forecast can be said that if it mean of the demand forecast is ordered and demand is normally distributed, then there is a 0.50 probability that all demand is served because there is a 0.50 probability that the demand is less or will be lesser than the mean of the demand forecast.