Flextrola, Inc., an electronics systems integrator, is planning to design a key component for its next-generation product with Solectrics. Flextrola will integrate the component with some software and then sell it to consumers. Given the short life cycles of such products and the long lead times quoted by Solectrics, Flextrola only has one opportunity to place an order with Solectrics prior to the beginning of its selling season. Flextrolas demand during the season is normally distributed with a mean of 1,500 and a standard deviation of 180.

Flextrola purchases the component from Solectrics at a cost of $55 per unit. Flextrola incurs essentially no cost associated with the software integration and handling of each unit.

Flextrola sells these units to consumers for $80 each. Flextrola can salvage unsold inventory at the end of the season in a secondary electronics market for $17 each.

1. What is the critical ratio?

2. The critical ratio you choose in the previous question implies that the newsvendor order quantity will be the mean demand.

lower than

equal

higher than

We cannot base on the critical ratio to determine the relation between the mean demand and the newsvendor order quantity.

3. What is the newsvendor order quantity Q*? (Round UP your answer to the nearest integer)

4. Please indicate which of the following will cause an INCREASE in the newsvendor order quantity?

A. The purchase cost decreases, while all other inputs remain the same.

B. The salvage value of the leftover inventory increases, while all other inputs remain the same.

C. The demand standard deviation decreases, while all other inputs remain the same.

A only

B only

C only

A and B

A and C

B and C

A B and C