One of the assumptions in the basic newsvendor problem is that there is a constant underage cost cu per unit short, independent of the size of the shortage. Suppose instead that there was a cost c1 if any shortage occurred and an additional cost c2 if the shortage exceeded some size Y (and no cost per unit short).

a. Why would a marginal analysis now be extremely difficult, if not impossible?

b. Indicate how you would develop a decision rule for determining the best order quantity Q. (Assume that there is an overage cost of co per unit leftover). For simplicity, treat Q and demand as continuous variables.? Lp852