Answer: b. stocking quantity of product B is higher.
Explanation:
We are using the Newsvendor model and are told that the products have identical cost, retail price, and demand parameters and the same short selling season.
Using this model, it is important to understand 2 terminologies for this question, Overage cost and Underage costs.
Overage Costs is the cost of unused inventor and is calculated by subtracting Salvage Value from the cost price.
Underage costs are costs arising from unmet Demand. In this scenario they are the same because both products share the same demand.
The Overage costs for the products are,
Overage cost for Product X =100-75
=25%
Overage cost for Product Y = 20%
When deciding which product to stick more of we look at the one with the higher CRITICAL RATIO.
The formula of which is,
= Cu/(Cu+Co)
Where,
Cu is the Underage cost,
Co is the Overage cost
As earlier mentioned, both have the same Underage cost meaning that B will give a higher CRITICAL ratio as it's Co is smaller.
Product B should therefore be stocked more than Product A.
