Question

Calculate the expected cost per stockout with the following information: Probability of a back order is 50%, lost sale is 25%, and the probability of a lost customer is 25%. The cost per incident of a back order is $150, lost customer is $250,000. Sales price of the item is $1,500 with a 20% profit margin. The average order is 50.
a) $250,000
b) $150
c) $15,000
d) $66,325
e) None of the above

Answer 1

Answer:

D) $66,325

Explanation:

the total costs associated with a stockout are:

• probability of a back order 50% x cost of a back order $150 = $75
• probability of a lost consumer 25% x cost of a lost consumer $250,000 = $62,500
• lost gross margin = probability of a lost consumer 25% x $1,500 x 50 units x 20% = $3,750

total costs of a stockout = $75 + $62,500 + $3,750 = $66,325