Matching Supply with Demand: An Introduction to Operations Management

2nd Edition
Questions for Chapter 11 newsvendor model
Last updated 3/4/08
There are two kinds of questions, quantitative questions that require some calculation and
qualitative questions that do not. All questions are presented in multiple-choice format
but could be converted to other formats. Solutions are located in separate files on the
Online Learning Center. These questions do not overlap the end-of-chapter questions in
the text. Some questions are based on specific cases, but could be modified to make them
more generic. Many questions share a common cover story or body of assumptions the marker *** is used to distinction between blocks of questions. Newsvendor
questions that relate to the use of reactive capacity (and are therefore slightly more
difficult to formulate for the student) are in the Chapter 12 file.
Copyright Gerard Cachon and Christian Terwiesch: Instructors adopting our text are free
to use these questions.
QUANTITATIVE QUESTIONS
Dans Independent Book Store is trying to decide on how many copies of a book to
purchase at the start of the upcoming selling season. The book retails at $28.00. The
publisher sells the book to Dan at $20.00. Dan will dispose of all of the unsold copies of
the book at 50% off the retail price, at the end of the season. Dan estimates that demand
for this book during the season is Normal with a mean of 1000 and a standard deviation
of 250.
1) Suppose Dan orders 1100 copies. What is Dans expected fill rate? Choose the
closest answer. Show all work.
a) 44%
b) 54%
c) 57%
d) 65%
e) 92%
f) 94%
g) 98%
h) 99%

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2) Suppose Dan wants to maximize his expected profits from the sale of this book. How
many copies should he order from the publisher? Choose the closest answer. Show
all work.
a) 1000
b) 1020
c) 1045
d) 1125
e) 1340
f) 1375
3) Suppose Dan orders 1500 copies. What is Dans expected profit? Choose the closest
answer. Show all work.
a) 2840
b) 3900
c) 4970
d) 7990
e) 11020
f) 12000
g) 18000

4) Upon further reflection, Dan decided to look at the historical data on forecasts and
actual sales of comparable books:
Book
A
B
C
E
F
G
H
I
J
K
L
M
N
O
P
Q

Forecast
800
850
875
900
925
925
950
975
1000
1025
1150
1200
1275
1400
1450
1800

Actual
702
1568
1648
1319
878
1200
1499
437
606
1204
476
454
1382
486
1691
466

Suppose the appropriate critical ratio to choose an order quantity is 0.69 (which may
or may not correspond to the critical ratio evaluated in other questions) and Dans
forecast remains 1000 books. If Dan were to use the empirical distribution function

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table to choose an order, how many books would he purchase? Choose the closest
answer.
a) 1000
b) 1045
c) 1085
d) 1125
e) 1145
f) 1255
g) 1295
5) Suppose Dan orders four copies of the poetry book. What is Dans expected sales?
Choose the closest answer. Show all work.
a) 1.50
b) 1.90
c) 2.10
d) 2.20
e) 2.50
f) 3.30
g) 4.00
6) How many copies of the poetry book should Dan order to maximize his expected
profit? Show all work.
a) 1
b) 2
c) 3
d) 4
e) 5
f) 6
g) 7
h) 8
7) How many copies of the poetry book should Dan order to ensure at least a 90% fill
rate? Show all work.
a) 1
b) 2
c) 3
d) 4
e) 5
f) 6
g) 7
h) 8

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***
Woot! specializes in one day - one deal selling. Every day they sell a product that is not
available the next day. If the item sells out, all the excess demand is lost and if items are
left over, they are salvaged and not sold again on a future day. On a particular Monday,
Woot! sells Creative Labs blue-tooth adapter for only $15, buying them at $9 each. All
unsold adapters are sent back to the supplier at $7 each. If Woot! estimates demand to be
normally distributed with mean 500 and standard deviation of 70 units, how many
adapters should Woot! order from its supplier to maximize its expected profit? Choose
the closest answer.
a) 500
b) 510
c) 530
d) 550
e) 570
f) 600
g) 650
***
Elite Couture, a high-end fashion goods store has to decide on the quantity of Luella
Bartley handbags to sell during the Christmas season. The unit cost of the handbag is
$28.50 and the handbag sells for $150. All handbags remaining unsold at the end of the
season are purchased by a discounter for $20 each. Further, there is a significant 40%
inventory holding cost incurred for each unsold bag. Demand for bags is distributed
normally with mean 150 and standard deviation 20. How many bags should be purchased
to maximize expected profit? Choose the closest answer.
a) 150
b) 155
c) 160
d) 165
e) 170
f) 175
g) 180
***
.Zaza Fashions demand for the Polka Dot silk skirt during the Fall season is Poisson with
a mean of 6.5. Zaza calculates the order quantity that maximizes its expected profit using
the newsvendor model, and determines that the stock-out probability with that order
quantity is about 0.32724. What is the fill rate corresponding to that order quantity?
Choose the closest answer.
a) 33%
b) 67%
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c) 87%
d) 90%
e) 93%
f) 96%
g) 99%
h) The fill rate cannot be determined with the information provided.
***
Alpha Airlines has to decide how many meals to load on its daily 6 pm non-stop flight
from Philadelphia to Los Angeles. The meals are sold on board to economy class
passengers for $10.00 and cost the airline $4.00 each. All meal orders must be made at
least 48 hours before the flight departs. Any meals left over at the end of the flight are
tossed into the trash by the ground clean-up crew. Alpha estimates that the demand for
the meals on this flight is Poisson distributed with a mean of 9.
1. How many meals should Alpha order? (Choose the closest answer.)
a) 6
b) 7
c) 8
d) 9
e) 10
f) 11
g) 12
h) 13
i) 14
2. Suppose that Alpha wants to achieve a 75% fill-rate. How many meals should Alpha
order? (Choose the closest answer.)
a) 6
b) 7
c) 8
d) 9
e) 10
f) 11
g) 12
h) 13
i) 14
3. Alpha has decided to use all left-over meals on its local flight from Los Angeles to
Phoenix. They have determined that the cost of re-stocking such meals from the
Philadelphia-Los Angeles flight to the Los Angeles-Phoenix flight is $1.50. Any
extra meals used on the flight to Phoenix are sold for $5 and there will not be left over

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meals on that flight. How many meals should Alpha order for its flight to Los
Angeles? (Choose the closest answer.)
a) 6
b) 7
c) 8
d) 9
e) 10
f) 11
g) 12
h) 13
i) 14
***
WebFlix is an Internet DVD rental service. Customers mail back DVDs to the company
after watching them and then receive new ones in the mail based on their preference lists
that they maintain via the web. WebFlix currently has 10,000 customers and an average
customers daily DVD demand is Poisson with mean 0.25 (and each customers demand
is independent of the other customers demands). The existing DVD processing facility
is capable of handling 2600 DVDs on a given day without overtime. What is the
probability that this facility cannot handle daily demand without overtime? (Recall that,
when mean demand is large, Poisson distribution can be approximated by the Normal
distribution.) Choose the closest answer.
a) 1%
b) 2%
c) 5%
d) 7%
e) 10%
f) 15%
g) 20%

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QUALITATIVE QUESTIONS
In a particular setting where the newsvendor model applies, demand is Normally
distributed and the critical ratio is known to be 0.8. Then, if the profit maximizing
quantity were ordered,
a) the expected sales is less than expected demand;
b) the expected sales is greater than expected demand;
c) the expected sales is exactly equal to expected demand;
d) the expected sales could be less than, equal to or greater than expected demand.
***
In the newsvendor model, if the fill-rate is 99% which of the following is always true:
a) the in-stock probability is also 99%;
b) the gross margin is 1%;
c) the net profit is 1% of revenue;
d) the critical ratio is 0.99;
e) none of the above.
***
Which of these statements is/are true for the newsvendor model?
I. Expected sales + Expected leftover inventory = Expected demand.
II. Expected sales + Expected lost sales = Quantity purchased (Q).
Expected sales
III. In-stock probability =
.

a)
b)
c)
d)
e)
f)

I only.
II only.
III only.
I and II.
All of the above (I, II and III).
None of the above.

***
Consider two products A and B that have identical cost, retail price and demand
parameters and the same short selling season (the summer months from May through
August). The newsvendor model is used to manage inventory for both products. Product
A is to be discontinued at the end of the season this year, and the leftovers will be
salvaged at 75% of the cost. Product B will be re-offered next summer, so any leftovers
this year can be carried over to the next year while incurring a holding cost on each unit
left over equal to 20% of the product's cost. How do the stocking quantities for these
products compare?
a) Stocking quantity of product A is higher.

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b) Stocking quantity of product B is higher.

c) Stocking quantities are equal.
d) The answer cannot be determined from the data provided.
***
ONeill sells the same 3mm boot for surfing every year. Because this is a functional
product with little fashionable content, ONeill believes that this is a stable product, i.e.,
expected demand doesnt change from year to year. However, sales are concentrated in a
short period during the summer. ONeill plans to use sales data from the last five years to
forecast demand this year. Those data are 850, 1025, 1000, 990 and 875. Note, due to
the short selling season, in two of the seasons ONeill ran out of boots, whereas in three
of those seasons ONeill had boots left over at the end of the season and they were held
over until the next season. What is the mean of the demand forecast?
a)
The mean of ONeills demand forecast should equal 948.
b)
The mean of ONeills demand forecast should be greater than 948.
c)
The mean of ONeills demand forecast should be less than 948.
d)
It is not possible to determine whether ONeills forecast should be 948,
greater than 948 or less than 948.
***
When using A/F ratios to construct a demand forecast
a) It is necessary that you have at least 20 data observations to construct a reasonable
forecast.
b) The products you use to collect your data should be physically similar.
c) You should not combine data from multiple seasons.
d) The demand forecast you generate using an empirical A/F ratio distribution
function could be quite similar to one generated by fitting a Normal distribution
function.
e) Choices a-d are all incorrect.
f) Choices a-d are all correct.
***
A reseller supports a sales team that is responsible for selling a group of products. The
reseller plans to use the newsvendor model to guide ordering decisions for these products.
How should the total salaries of the sales force be incorporated into the newsvendor
model analysis? (Focus only on salaries, i.e., ignore sales bonuses or other forms of
compensation.)
a)
Salary costs should be prorated across products based on expected sales and
that prorated amount should be added to the products variable cost.
b)
Salary costs should be prorated across products based on expected sales and
that prorated amount should be added to the products overage cost.
c)
Salary costs should be prorated across products based on expected purchase
quantities and that prorated amount should be added to the products variable cost.
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d)

Salary costs should be prorated across products based on expected purchase

quantities and that prorated amount should be added to the products overage cost.
e)
Salary costs should not be included in the newsvendor analysis.
***
Suppose a company uses the newsvendor model to manage its inventories and faces
normally distributed demand with a coefficient of variation = 1. The company decides to
order a quantity that exactly equals its mean demand forecast. Which of the following is
true regarding this companys performance measures?
a)
b)
c)
d)
e)

The probability of serving all the demand is 50%

Expected lost sales is 50% of mean demand
Expected sales is equal to mean demand
Expected left over inventory is 0
The fill rate is 50%

***
A company collected data on the performance of their forecasts of 38 items in the
previous season. The average A/F ratio across this sample is 1.02 and the standard
deviation of the A/F ratios is 0.40. The average forecast is 2405 units. The data are
plotted in the following graph.

What comment best describes the quality of their forecasting process?

a) Their forecasts are too optimistic.
b) Their forecasts are too pessimistic.
c) Their forecast errors are small because the average A/F ratio is close to 1.00.

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d) Their high forecasts are too pessimistic and low forecasts are too optimistic.
e) Their high forecasts are too optimistic and low forecasts are too pessimistic.
f) It is not possible to assess the quality of their forecasts because of the inherent
randomness of the forecast errors.
***
In the Le Club Franais du Vin case study, the following change would increase the
ordering quantity for red wines:
a)
Increase the shipping and handling cost per bottle.
b)
Increase the end-of-season discounts.
c)
Increase the time to sell-off slow-moving wines from 12 months to 24 months.
d)
Increase the cost of capital.
e)
None of the above.
***
Suppose the newsvendor model is used to manage inventories. Which of the following
can happen when the order quantity is increased by one unit?
a)
Expected sales increases by more than one unit.
b)
Expected lost sales increases by more than one unit.
c)
Expected leftover inventory increases by more than one unit.
d)
Expected sales decreases by less than one unit.
e)
Expected lost sales decreases by less than one unit.
f)
Expected leftover inventory decreases by less than one unit.
g)
None of the above.
***
ONeill uses A/F ratios to measure the quality of their forecasting of seasonal items.
They use the newsvendor model to choose order quantities. ONeill improves its
forecasting with time. After several seasons of implementing this process which of the
following should ONeill observe:
a)
The average A/F ratio should get closer to the average critical ratio of the
products.
b)
The average A/F ratio should get closer to the target fill rate (which is the
same across all products).
c)
The average A/F ratio should get closer to the stock-out probability (which is
the same across all products).
d)
The standard deviation of the A/F ratios should get closer to 1.
e)
The maximum A/F ratio should decrease and/or the minimum A/F ratio should
increase.
f)
None of the above.

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