Chapter 14 Betting on Uncertain Demand The Test Bank Docx

Matching Supply with Demand: An Introduction to Operations Management, 4e (Cachon)

Chapter 14 Betting on Uncertain Demand: The Newsvendor Model

[The following information applies to questions 1-5.]

Goop Inc. needs to order a raw material to make a special polymer. The demand for the polymer is forecasted to be normally distributed with a mean of 250 gallons and a standard deviation of 125 gallons. Goop sells the polymer for $25 per gallon. Goop purchases raw material for $10 per gallon and Goop must spend $5 per gallon to dispose of unused raw material due to government regulations. (One gallon of raw material yields one gallon of polymer.) If demand is more than Goop can make, then Goop sells only what they made, and the rest of demand is lost.

1) Suppose Goop purchases 150 gallons of raw material. What is the probability that they will run out of raw material? (Enter the answer as a percentage)

Difficulty: 3 Hard

Topic: The Newsvendor Model: Structure and Inputs

AACSB: Knowledge Application

Blooms: Apply

2) Suppose Goop purchases 300 gallons of raw material. How many gallons of demand on average would remain unfulfilled?

Difficulty: 3 Hard

Topic: The Newsvendor Model: Structure and Inputs

AACSB: Knowledge Application

Blooms: Apply

3) Suppose Goop purchases 400 gallons of raw material. How much should they expect to spend on disposal costs?

Difficulty: 3 Hard

Topic: The Newsvendor Model: Structure and Inputs

AACSB: Analytical Thinking

Blooms: Analyze

4) Suppose Goop wants to ensure that there is a 92% probability that they will be able to satisfy the customer's entire demand. How many gallons of raw material should they purchase?

Difficulty: 3 Hard

Topic: How to Choose and Order Quantity

AACSB: Knowledge Application

Blooms: Apply

5) How many gallons should Goop purchase to maximize its expected profit?

Difficulty: 3 Hard

Topic: How to Choose and Order Quantity

AACSB: Analytical Thinking

Blooms: Analyze

[The following information applies to questions 6-7.]

Betty Cooker runs a bakery in San Francisco that specializes in her famous Black Forest cakes. These cakes come with four kinds of frostings: vanilla, chocolate, raspberry and devilicious. She estimates that the daily demand for each type of cake is independent and is normally distributed with a mean of 50 and a standard deviation of 20. Each customer wants to buy exactly one cake. Customers who favor a particular type of frosting will not buy any other if their preferred frosting is out of stock. Every day in the morning, Betty Cooker and her team of bakers prepare a fresh batch of the cakes for sale that day. Her costs to bake and top each cake are $5. Each cake sells for $15. Betty's Bakery prides itself on its fresh assortment, so cakes not sold by the end of that day are given away to a soup kitchen for the homeless.

6) Suppose Betty wants to bake enough cakes so that she can be 97.5% sure that she can satisfy the demand of all of her customers. How many cakes with devilicious frosting should she prepare daily in the morning? (Enter the answer as a whole number, do not round)

Difficulty: 3 Hard

Topic: How to Choose and Order Quantity

AACSB: Analytical Thinking

Blooms: Analyze

7) She hires a consultant, Trump McDonald, who advises her to, "Focus on maximizing your expected daily profits, and the customer demand will take care of itself." In order to maximize profits, Trump advises Betty to bake 60 Devilicious cakes. What would be Betty's expected profit from Devilicious cakes if she followed Trump's advice?

Difficulty: 3 Hard

Topic: Performance Measures

AACSB: Analytical Thinking

Blooms: Analyze

8) Bob's Fly catalog collected forecasts, sales, and demand data for 20 items in one category from its previous catalog. The data is provided below in the table.

For example, their forecast for the first item in the table was 100 units, but it unfortunately only sold 26 units. However, with the last item listed, they sold 341 units but could have sold 569 units if they had ordered enough inventory.

For the next catalog, they have an item for which they forecast demand to be 400 units. Suppose they will use that forecast along with the data in the above table to choose a normal distribution to model demand for this product. What mean and standard deviation should they choose? (Separate your answers with a comma)

Difficulty: 3 Hard

Topic: How to Construct a Demand Forecast

AACSB: Analytical Thinking

Blooms: Analyze

[The following information applies to questions 9-10.]

The Penn Bookstore sells several magazines. A single stocking quantity is ordered for each issue. When a new issue arrives, any remaining copies of the old issue are returned to the publisher. If a magazine sells out, then it remains unavailable until the next issue arrives.

Consider the following data on Bits and Bytes magazine at the Penn Bookstore:

The forecast column lists their forecast of demand for that issue (when they ordered copies for that issue). It is generated by an internal computer system that accounts for seasonality and other events in the store (which is why the forecast varies from issue to issue). The quantity column is the actual number of issues stocked that week, and the sales column provides the number of units actually sold. The estimated demand column provides an estimate of what sales could have been, had there been no stockouts. (If sales are less than or equal to the order quantity, the estimated demand equals sales; otherwise, it can be greater.)

9) The system forecasts that week 37 demand at this location will be for 25 copies. Suppose they were to choose a normal distribution to represent demand in week 37. What mean and standard deviation should they choose? (Separate your answers with a comma)

Difficulty: 3 Hard

Topic: How to Construct a Demand Forecast

AACSB: Analytical Thinking

Blooms: Analyze

10) Suppose the week 39 forecast is for 20 copies. What would be the coefficient of variation of demand? Again, assume a normal distribution is chosen to model demand. (Include all decimal places in your answer)

Difficulty: 3 Hard

Topic: How to Construct a Demand Forecast

AACSB: Analytical Thinking

Blooms: Analyze

11) Consider Modern Active MBA, a periodical dedicated to selecting an MBA program and getting the most out of the experience. The publisher charges the Penn Bookstore $1.50 for each copy of MAMBA sold. It costs the publisher $0.35 to print and deliver each copy of the magazine. Leftover copies are discarded at a cost of $0.05 per copy to the publisher. If it were up to the publisher, how many copies of a particular issue of MAMBA should the publisher stock at the bookstore when the forecast of demand is normally distributed with a mean of 40 and a standard deviation of 22? (Enter the answer as a whole number, do not round)

Difficulty: 3 Hard

Topic: How to Construct a Demand Forecast

AACSB: Analytical Thinking

Blooms: Analyze

12) The Penn Bookstore is doing an audit of the magazine procurement process. A consultant recommends an in-stock probability of 80% for all of the magazines they stock. If they follow the consultant's recommendation (and achieve an 80% in-stock probability), what is the expected percentage of their magazines that will experience a stock-out? (Enter the answer as a percentage)

Difficulty: 3 Hard

Topic: Performance Measures

AACSB: Knowledge Application

Blooms: Apply

13) National Geographic still sells a considerable number of copies. Its demand for the April issue is forecasted to be normally distributed with a mean of 80 and a standard deviation of 35. If the Penn Bookstore stocks 100 copies, how many copies can they expect to return to the publisher at the end of the month? (National Geographic is a monthly periodical.) (Enter the answer as a whole number, do not round)

Difficulty: 3 Hard

Topic: How to Choose and Order Quantity

AACSB: Analytical Thinking

Blooms: Analyze

14) Consider another magazine, Green Business. The forecast for an issue is Poisson with mean 4.25. How many issues should the Penn Bookstore stock if they want to ensure a 99.6% in-stock probability?

Difficulty: 3 Hard

Topic: The Newsvendor Model: Structure and Inputs

AACSB: Knowledge Application

Blooms: Apply

15) If they happen to order 6 copies of Green Business, how many copies of Green Business should they expect to sell (i.e., expected sales)? (Recall, demand is Poisson with mean 4.25.)

Difficulty: 3 Hard

Topic: Performance Measures

AACSB: Analytical Thinking

Blooms: Analyze

16) Demand for Surf World is Poisson with mean 2.5. If they happen to stock 5 copies, what is the expected number of customers who will want to purchase Surf World but will be unable to do so because the bookstore runs out of copies? (Include all decimal places in your answer)

Difficulty: 3 Hard

Topic: Performance Measures

AACSB: Knowledge Application

Blooms: Apply

17) Mensa and Muscles is a weight training and fitness magazine for cerebral men and women. Demand for the March issue is forecasted to be Poisson with a mean of 8.0, and 9 copies of M&M are stocked. What is the probability that all demand for M&M will be satisfied? (Enter the answer as a percentage)

Difficulty: 3 Hard

Topic: The Newsvendor Model: Structure and Inputs

AACSB: Knowledge Application

Blooms: Apply

[The following information applies to questions 18-21.]

Share&Care is a nonprofit car share company that rents cars. When a customer makes a reservation, they specify their pickup time and the number of time slots they will hold the vehicle, where each time slot equals 15 minutes. For example, if the pickup time is 1 pm, then possible drop off times are 1:15 (1 slot), 1:30 (2 slots), etc. Share&Care charges $1.50 for each time slot in the reservation. To discourage customers from returning the rented cars beyond their drop off time, they charge $20 per time slot used beyond the drop off time. For example, if a customer's drop off time is 2:30 and he returns the vehicle at 2:47, then he is charged $40 for the 2 time slots he used beyond his reservation (and of course, $1.50 per slot that he reserved).

Larry runs a small business that makes deliveries on Fridays. The number of time slots he needs is well modeled by a Poisson distributed with mean 4. He books his car 2 days in advance before he knows his needs exactly. (He does this to ensure availability of a car.). Assume on the day of the reservation Larry learns his needs and has little control over the number of slots he needs. For example, if he needed 5 slots but booked 4 slots, then he uses the car for 5 slots, for a total charge of 4 * $1.50 + $20 = $26. If he ends up booking the car for more time than he needs, the extra time on the car has no value to him.

18) What is the probability that Larry needs exactly 2 time slots? (Enter the answer as a percentage)

Difficulty: 3 Hard

Topic: How to Construct a Demand Forecast

AACSB: Analytical Thinking

Blooms: Analyze

19) Suppose he books the car for 2 time slots. How likely is he to pay $40 or more in late fees? (Enter the answer as a percentage)

Difficulty: 3 Hard

Topic: How to Construct a Demand Forecast

AACSB: Analytical Thinking

Blooms: Analyze

20) To minimize his rental costs, how many time slots should Larry reserve the car for?

Difficulty: 3 Hard

Topic: How to Choose and Order Quantity

AACSB: Analytical Thinking

Blooms: Analyze

21) Larry has a new plan. Whenever his need for the car exceeds the number of slots he has rented the car for, he returns the car on time to avoid the fine and uses his bicycle for the remaining deliveries. Unfortunately, bike deliveries take 3 times longer than car deliveries. Suppose he rents the car for 5 slots (75 minutes). If he needs 7 slots, then he uses the car for 5 slots, and the remaining 2 slots are done by bicycle, which takes 6 slots (1.5 hours). How much time does he expect to bicycle on average (in terms of slots)? (Round answer to the nearest tenth)

Difficulty: 3 Hard

Topic: The Newsvendor Model: Structure and Inputs

AACSB: Analytical Thinking

Blooms: Analyze

[The following information applies to questions 22-24.]

Montanso is a large bio firm that sells genetically modified seed to farmers. They need to decide how much seed to put into a warehouse to serve the demand for the next growing season. They will make one quantity decision. It costs Montanso $8 to make each kilogram (kg) of seed. They sell each kg for $45. If they have more seed than demanded by the local farmers, the remaining seed is sent overseas. Unfortunately, they only earn $3 per kg from the overseas market (but this is better than destroying the seed because it cannot be stored until next year). If demand exceeds their quantity, then the sales are lost, and the farmers go to another supplier. As a forecast for demand they will use a normal distribution with a mean of 300,000 and a standard deviation of 106,000.

22) How many kilograms should they place in this warehouse before the 2011 growing season?

Difficulty: 3 Hard

Topic: How to Choose and Order Quantity

AACSB: Analytical Thinking

Blooms: Analyze

23) Ignoring the analysis in the previous question, how many kilograms should they place in this warehouse if they want to minimize their inventory while ensuring that the stockout probability is no greater than 10%?

Difficulty: 3 Hard

Topic: How to Construct a Demand Forecast

AACSB: Knowledge Application

Blooms: Apply

24) A senior executive at the company asks the following "Suppose we were to place 500,000 kilograms in this warehouse. What is the probability that our total revenue will be at least $18,000,000?" (Note: The revenue comes from both local sales and overseas sales. Furthermore, you are concerned with revenue and not profit, so you can ignore costs). (Enter the answer as a percentage)

Difficulty: 3 Hard

Topic: How to Construct a Demand Forecast

AACSB: Analytical Thinking

Blooms: Analyze

[The following information applies to questions 25-26.]

Dan's 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.

25) Suppose Dan wants to maximize his expected profits from the sale of this book. How many copies should he order from the publisher?

Difficulty: 3 Hard

Topic: How to Choose and Order Quantity

AACSB: Analytical Thinking

Blooms: Analyze

26) Suppose Dan orders 1500 copies. What is Dan's expected profit?

Difficulty: 3 Hard

Topic: How to Choose and Order Quantity

AACSB: Analytical Thinking

Blooms: Analyze

[The following information applies to questions 27-28.]

Consider a new anthology of Greek poetry from the 1930s. The publisher is selling the book for $82.50, and Dan plans a 25% gross margin on this book, i.e., the price will be $110. Dan estimates that demand over the next year has a Poisson distribution with mean 2.5. At the end of the year, Dan will sell leftover books to a discounter and probably will only get 20% of the wholesale price for each copy.

27) Suppose Dan orders four copies of the poetry book. What are Dan's expected sales? (Round answer to the nearest whole number)

Difficulty: 3 Hard

Topic: The Newsvendor Model: Structure and Inputs

AACSB: Analytical Thinking

Blooms: Analyze

28) How many copies of the poetry book should Dan order to maximize his expected profit?

Difficulty: 3 Hard

Topic: How to Choose and Order Quantity

AACSB: Analytical Thinking

Blooms: Analyze

29) 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? (Enter answer as whole number, do not round)

Difficulty: 3 Hard

Topic: How to Choose and Order Quantity

AACSB: Analytical Thinking

Blooms: Analyze

30) 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. A discounter purchases all handbags remaining unsold at the end of the season 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 the expected profit? (Enter answer as whole number, do not round)

Difficulty: 3 Hard

Topic: How to Choose and Order Quantity

AACSB: Analytical Thinking

Blooms: Analyze

31) 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 news vendor model and determines that the stock-out probability with that order quantity is 0.32724. What is the in-stock probability corresponding to that order quantity? (Answer should include all decimal places)

Difficulty: 3 Hard

Topic: The Newsvendor Model: Structure and Inputs

AACSB: Knowledge Application

Blooms: Apply

[The following information applies to questions 32-34.]

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.

32) How many meals should Alpha order?

Difficulty: 3 Hard

Topic: The Newsvendor Model: Structure and Inputs

AACSB: Knowledge Application

Blooms: Apply

33) Suppose that Alpha wants to achieve a 75% in-stock probability. How many meals should Alpha order?

Difficulty: 3 Hard

Topic: The Newsvendor Model: Structure and Inputs

AACSB: Knowledge Application

Blooms: Apply

34) 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 leftover meals on that flight. How many meals should Alpha order for its flight to Los Angeles?

Difficulty: 3 Hard

Topic: The Newsvendor Model: Structure and Inputs

AACSB: Analytical Thinking

Blooms: Analyze

35) 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 customer's daily DVD demand is Poisson with mean 0.25 (and each customer's 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.) (Enter the answer as a percentage)

Difficulty: 3 Hard

Topic: The Newsvendor Model: Structure and Inputs

AACSB: Analytical Thinking

Blooms: Analyze

36) Suppose the news vendor model describes a firm's operations decision. Is it possible to have positive expected lost sales and positive expected leftover inventory? Choose the best answer.

A) No, if there is leftover inventory, then there should not be lost sales.

B) No, if expected lost sales are positive, then expected leftover inventory must be negative.

C) No, actual demand can differ from sales.

D) Yes, they are both expectations over numerous possible outcomes, among which there will be no outcome in which both are positive.

E) Yes, as long as the underage cost is greater than the overage cost.

Difficulty: 2 Medium

Topic: The Newsvendor Model: Structure and Inputs

AACSB: Reflective Thinking

Blooms: Analyze

37) A firm is considering the use of the A/F method in the upcoming season to forecast their demand and to choose order quantities. They collected data from last year's products in the category. (See the table.) Based on these data, they plan to fit a normal distribution to each of the current products. The mean of the normal will equal their forecast, and the standard deviation will equal 28% of their forecast. What is likely to be a problem with their approach to the A/F method? Choose the best answer.

A) They shouldn't use the normal distribution to model demand and should instead use the empirical demand distribution.

B) There must be something wrong with their data because the average A/F ratio is rarely equal to 1 (in which case it is unbiased).

C) They did not sort their A/F ratios from least to greatest.

D) Their order quantities are likely to be too low because they didn't keep track of actual demand.

E) They need more data because at least 20 observations are needed to implement this method.

F) They need to have more than one forecast per product because they need to estimate standard deviations.

Difficulty: 3 Hard

Topic: How to Construct a Demand Forecast

AACSB: Reflective Thinking

Blooms: Analyze

38) Suppose a firm uses an A/F ratios approach (similar to Le Club case) to come up with demand forecast. The average A/F ratio from historical data turns out to be 0.8. What is the best conclusion that can be drawn from this observation?

A) The optimal order quantity should be 0.8 times the forecast.

B) The critical ratio of the product in the past was 0.8.

C) The coefficient of variation of demand will be 0.8.

D) There is a bias in the forecasting process: forecasts are on average higher than demand.

E) There is a bias in the forecasting process: forecasts are on average lower than demand.

F) None of the above

Difficulty: 2 Medium

Topic: How to Construct a Demand Forecast

AACSB: Reflective Thinking

Blooms: Analyze

39) In a particular setting where the news vendor 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 are less than expected demand;

B) The expected sales are greater than expected demand;

C) The expected sales are exactly equal to expected demand;

D) The expected sales could be less than, equal to or greater than expected demand.

Difficulty: 2 Medium

Topic: How to Choose and Order Quantity

AACSB: Reflective Thinking

Blooms: Analyze

40) For products with slow-moving demand, e.g., 1 unit per week, the Poisson distribution is likely to be a better model for demand than the normal distribution because (choose the best answer).

A) The Poisson's standard deviation is equal to the square root of its mean.

B) The normal distribution does not allow the freedom to choose any standard deviation for any given mean.

C) The Poisson distribution is a continuous distribution.

D) Only the standard normal distribution would apply in this setting.

E) The Poisson distribution does not assign any probability to negative outcomes.

Difficulty: 3 Hard

Topic: How to Choose and Order Quantity

AACSB: Reflective Thinking

Blooms: Analyze

41) 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 news vendor 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.

B) Stocking quantity of product B is higher.

C) Stocking quantities are equal.

D) The answer cannot be determined from the data provided.

Difficulty: 3 Hard

Topic: How to Choose and Order Quantity

AACSB: Analytical Thinking

Blooms: Analyze

42) O'Neill sells the same 3mm boot for surfing every year. Because this is a functional product with little fashionable content, O'Neill believes that this is a stable product, i.e., expected demand doesn't change from year to year. However, sales are concentrated in a short period during the summer. O'Neill 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 O'Neill ran out of boots, whereas in three of those seasons O'Neill 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 O'Neill's demand forecast should equal 948.

B) The mean of O'Neill's demand forecast should be greater than 948.

C) The mean of O'Neill's demand forecast should be less than 948.

D) It is not possible to determine whether O'Neill's forecast should be 948, greater than 948 or less than 948.

Difficulty: 2 Medium

Topic: How to Construct a Demand Forecast

AACSB: Reflective Thinking

Blooms: Analyze

43) A reseller supports a sales team that is responsible for selling a group of products. The reseller plans to use the news vendor model to guide ordering decisions for these products. How should the total salaries of the sales force be incorporated into the news vendor 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 product's variable cost.

B) Salary costs should be prorated across products based on expected sales, and that prorated amount should be added to the product's overage cost.

C) Salary costs should be prorated across products based on expected purchase quantities, and that prorated amount should be added to the product's variable cost.

D) Salary costs should be prorated across products based on expected purchase quantities, and that prorated amount should be added to the product's overage cost.

E) Salary costs should not be included in the news vendor analysis.

Difficulty: 3 Hard

Topic: The Newsvendor Model: Structure and Inputs

AACSB: Analytical Thinking

Blooms: Analyze

44) Suppose a company uses the news vendor 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 company's performance measures?

A) The probability of serving all the demand is 50%.

B) Expected lost sales are 50% of mean demand.

C) Expected sales are equal to mean demand.

D) Expected leftover inventory is 0.

Difficulty: 2 Medium

Topic: How to Construct a Demand Forecast

AACSB: Reflective Thinking

Blooms: Analyze

45) 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 is 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.

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.

Difficulty: 2 Medium

Topic: How to Construct a Demand Forecast

AACSB: Analytical Thinking

Blooms: Analyze

46) In the Le Club Français 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.

Difficulty: 2 Medium

Topic: How to Choose and Order Quantity

AACSB: Reflective Thinking

Blooms: Analyze

47) Suppose the news vendor 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.

Difficulty: 2 Medium

Topic: The Newsvendor Model: Structure and Inputs

AACSB: Reflective Thinking

Blooms: Analyze

48) O'Neill uses A/F ratios to measure the quality of their forecasting of seasonal items. They use the news vendor model to choose order quantities. O'Neill improves its forecasting with time. After several seasons of implementing this process which of the following should O'Neill 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 in-stock probability (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.

Difficulty: 2 Medium

Topic: How to Construct a Demand Forecast

AACSB: Reflective Thinking

Blooms: Analyze