CHAPTER 13

INVENTORY MANAGEMENT WITH PERISHABLE DEMAND

CONCEPTUAL QUESTIONS
1.
Answer: C.
Feedback: The density function has a bell shape, but the distribution function is
always increasing, so it never has a bell shape.
2.
Answer: A. Product X, because it has less certain demand
Feedback: Product X has a higher standard deviation of demand, and therefore its
optimal order quantity is greater given the same mean and critical ratio.
3.
Answer: B. The quantity of product Y is higher
Feedback: The salvage value of product X is 75% of its cost. The overage cost, Co, is
the difference between product X’s cost and its salvage value, which is then 100% -
75% = 25% of cost. Product Y’s overage cost is 20% of its cost. Both products have
the same underage cost, Cu, so product X has the higher overage cost, which means it
has the lower critical ratio, Cu / (Co + Cu). Given they have the same demand
distribution, product X’s optimal order quantity must be lower, or product Y’s
stocking quantity is higher.
4.
Answer: D.
Feedback: It is not possible to stockout and have leftover inventory at the same time,
but either one is possible, which is why there is a positive probability of a stockout
and a positive expectation for leftover inventory.
5.
Answer: A.
Feedback: Expected sales is always less than expected demand, i.e., no matter the
critical ratio or the demand distribution.

1
6.
Answer: A. There is a 0.50 probability that there is enough inventory to serve all
demand
Feedback: If the mean of the demand forecast is ordered and demand is normally
distributed, then there is a 0.50 probability that all demand is served because there is
a 0.50 probability that demand is less than the mean of the forecast.
7.
Answer: D. Bob, because he is probably ordering more than the mean of the
demand forecast
Feedback: At the quantity that maximizes expected profit, the probability of stocking
out is 1 minus the critical ratio. So in this case the probability of a stockout is less than
0.5. So Sue is too conservative.
8.
Answer: D. Expected leftover inventory increases by less than one unit
Feedback: If the order quantity is increased by one unit, expected sales and expected
leftover inventory increase. But they cannot increase by more than one unit – the
most that sales can increase is by one unit and the most that leftover inventory can
increase is by one unit.
9.
Answer: D. An increase in the in-stock probability from 80% to 95%
Feedback: The order quantity to achieve an in-stock probability increases in the
desired in-stock probability at an increasing rate. Thus, a 15% increase in the in-stock
has a larger change in the quantity than a 10% increase in the in-stock. And a 15%
increase starting at 80% has a larger increase than a 15% increase starting at 70%.
10.
Answer: E. The quality of the product
Feedback: Mismatch costs include the loss on inventory that is salvaged and the
opportunity cost of demand that is not satisfied due to stockouts. Those are
influenced by all of the items except the quality of the product.
11.

2
 Answer: B. The regular selling price of the product
Feedback: The maximum profit depends on the profit earned per unit and the mean
of the demand forecast. The profit earned per unit depends on the selling price.
12.
Answer: C. Mean = 2,000, standard deviation = 300
Feedback: The product with the lowest coefficient of variation will have the highest
probability of demand being within 50% of the mean of the demand forecast.
13.
Answer: A. Demands for these products are negatively correlated
Feedback: If the products were independent then the standard deviation of total
demand would be sqrt(2) x 50. Given that the actual standard deviation of total
demand, 50, is less than what it would be if the demands were independent, sqrt(2) x
50, the demands must be negatively correlated.
14.
Answer: B. Make-to-order
Feedback: QBlitz submits its order after learning demand. It doesn’t assemble the
product and customers do not receive unique products.

PROBLEMS AND APPLICATIONS

1.
(a)
Answer: 0.0062
Feedback: z = (400 – 200)/ 80 = 2.5. Using Table 13.4, F(2.5) = 0.9938. The probability
that the book is a blockbuster is 1 – F(2.5) = 0.0062.
(b)
Answer: 0.1057
Feedback: The book is a “dog” if it sells less than 100 copies. We compute z = (100 –
200)/ 80 = -1.25. Using Excel, F(-1.25) = 0.1057. Using Table 13.4, F(-1.25) is between
F(-1.3) = 0.0968 and F(-1.2) = 0.1151.
(c)
Answer: 0.3830

3
 Feedback: If demand for the book is within 20% of the mean forecast, it would be
between 160 and 240 copies. This corresponds to z = -0.50 and z = 0.50. Using Table
13.4, F(0.50) – F(-0.50) = 0.6915 – 0.3085 = 0.3830.
(d)
Answer: 240
Feedback: We have Cu = 20 – 12 = 8 and Co = 12 – 8 = 4. This gives the critical ratio of
8/(4 + 8) = 0.6667. Using Table 13.4 and the round-up rule, this corresponds to z =
0.50. The optimal order quantity is 200 + 0.50 * 80 = 240.
(e)
Answer: 0.05
Feedback: The probability that some customer cannot purchase the book is 1 minus
the in-stock probability.
(f)
Answer: 107.64
Feedback: An order quantity of 300 corresponds to z = (300 – 200)/ 80 = 1.25. Using
Table 13.4 and the round-up rule, we have I(1.30) = 1.3455. We multiply this by the
standard deviation of 80 to get the expected left-over inventory.
(g)
Answer: 192.36
Feedback: If the order quantity is 300, the expected inventory is 107.64 (from
question 6). The expected sales is 300 – 107.64 = 192.36.
(h)
Answer: $1,104
Feedback: Using the answers from questions f and g, the expected profit when the
order quantity is 300 is (20 × 192) +( 8 × 108) – (12 × 300) = 1,104.
(i)
Answer: 336
Feedback: According to Table 13.4 and the round-up rule, a 95% in-stock probability
corresponds to z = 1.70. This results in an order quantity of 200 + 1.7 * 80 = 336.

2.

4
(a)
Answer: 0.3231
Feedback: Sales within 25% of the mean forecast would be between 750 and 1,250
units. This corresponds to z = -0.4167 and z = 0.4167. Using Excel, we have F(0.4167)
– F(-0.4167) = 0.6615 – 0.3385 = 0.3230.
(b)
Answer: 0.2525
Feedback: The value that is 40% greater than the mean forecast is 1,400 units. This
corresponds to z = (1,400 – 1,000)/ 600 = 0.6667. Using Excel, we have F(0.6667) =
0.7475. The probability that demand is greater than 1,400 units is 1 – 0.7475 =
0.2525.
(c)
Answer: 1,300
Feedback: We have Cu = 121 – 72 = 49 and Co = 72 – 50 = 22. This gives the critical
ratio of 49/(22 + 49) = 0.6901. Using Table 13.4 and the round-up rule, this
corresponds to z = 0.50. The optimal order quantity is 1,000 + 0.50 * 600 = 1,300.
(d)
Answer: 378.24
Feedback: An order quantity of 1,200 corresponds to z = (1,200 – 1,000)/600 =
0.3333. Using Table 13.4 and the round-up rule, we have I(0.40)= 0.6304. We multiply
this by the standard deviation of 600 to get the expected left-over inventory.
(e)
Answer: 821.76
Feedback: If the order quantity is 1,200, the expected inventory is 378.24 (from
question 13). The expected sales are 1,200 – 378.24 = 821.76.
(f)
Answer: $31,944.96
Feedback: Using the answers from questions 13 and 14, the expected profit when the
order quantity is 1,200 is 121 * 821.76 + 50 * 378.24 – 72 * 1,200 = 31,944.96.

(g)

5
 Answer: 1,125
Feedback: The critical ratio is 0.6901. Using the graph of the distribution function in
Figure 13.16, this corresponds to a demand of approximately 1,125 units.

3.
(a)
Answer: 420,000
Feedback: We have Cu = 45 – 8 = 37 and Co = 8 – 3 = 5. This gives the critical ratio of
37/(5 + 37) = 0.8810. Using Table 13.4 and the round-up rule, this corresponds to z
= 1.20. The optimal order quantity is 300,000 + 1.20 * 100,000 = 420,000.
(b)
Answer: 13,450,140
Feedback: An order quantity of 400,000 corresponds to z = (400,000 –
300,000)/100,000 = 1. Using Table 13.4, we have I(1) = 1.0833. We multiply this by
the standard deviation of 100,000 to get the expected leftover inventory of 108,330.
The expected sales are 400,000 – 108,330 = 291,670. The expected revenue is 45 *
291,670 + 3 * 108,330 = 13,450,140.
(c)
Answer: 430,000
Feedback: A 10% stockout probability corresponds to a 90% in-stock probability.
According to Table 13.4, this requires z = 1.30. This yields an order quantity of
300,000 + 1.30 * 100,000 = 430,000.
(d)
Answer: 11,100,000
Feedback: The maximum profit is (45 – 8) * 300,000 = 11,100,000.

4.
(a)
Answer: 560

6
 Feedback: We have Cu = 70 – 40 = 30 and Co = 40 – 20 = 20. This gives the critical ratio
of 30/(20 + 30) = 0.6. Using Table 13.4 and the round-up rule, this corresponds to z =
0.3. The optimal order quantity is 500 + 0.3 * 200 = 560.
(b)
Answer: 900
Feedback: According to Table 13.4, a 97.5% in-stock probability requires z = 2.0. This
yields an order quantity of 500 + 2 * 200 = 900.
(c)
Answer: 45,945
Feedback: An order quantity of 725 corresponds to z = (725 – 500)/200 = 1.125. Using
Table 13.4 and the round-up rule, we have I(1.2) = 1.2561. We multiply this by the
standard deviation of 200 to get the expected leftover inventory of 251.22. The
expected sales are 725 – 251.22 = 473.78. The expected profit is 70 * 473.78 + 20 *
251.22 – 40 * 725 = 9,189. We have this same expected profit for all five sweaters, so
the total expected profit is 9,189 * 5 = 45,945.
(d)
Answer: 0.1303
Feedback: An order quantity of 725 corresponds to z = (725 – 500)/ 200 = 1.125.
Using Excel, the in-stock probability is F(1.125) = 0.8697, which means that the
stockout probability is 1 – 0.8697 = 0.1303. Using Table 13.4 and the round-up rule,
the in-stock probability is F(1.2) = 0.8849, and the stockout probability is 1 – 0.8849
= 0.1151.

5.
(a)
Answer: 0.1908
Feedback: 50% of the mean forecast is 1,050 units. This corresponds to z = (1,050 –
2,100)/1,200 = -0.875. Using Excel, F(-0.875) = 0.1908.
(b)
Answer: 2,340

7
 Feedback: We have Cu = 22 – 10 = 12 and Co = 10 – 0 = 10. This gives the critical ratio
of 12/(10 + 12) = 0.5455. Using Table 13.4 and the round-up rule, this corresponds
to z = 0.2. The optimal order quantity is 2,100 + 0.2 * 1,200 = 2,340.
(c)
Answer: 0.7734
Feedback: An order quantity of 3,000 corresponds to z = (3,000 – 2,100)/1,200 = 0.75.
Using Excel, the in-stock probability is F(0.75) = 0.7734.
(d)
Answer: 1,104.24
Feedback: An order quantity of 3,000 corresponds to z = (3,000 – 2,100)/1,200 = 0.75.
Using Table 13.4 and the round-up rule, we have I(0.8) = 0.9202. We multiply this by
the standard deviation of 1,200 to get 1,104.24.
(e)
Answer: 1,895.76
Feedback: If the order quantity is 3,000, the expected inventory (from question 28) is
1,104.24. The expected sales are 3,000 – 1,104.24 = 1,895.76.
(f)
Answer: 11,706.72
Feedback: Using the answers from questions 28 and 29, the expected profit when the
order quantity is 3,000 is 22 * 1,895.76 + 0 * 1,104.24 – 10 * 3,000 = 11,706.72.
(g)
Answer: 4,740
Feedback: According to Table 13.4, a 98.5% in-stock probability requires z = 2.2. This
yields an order quantity of 2,100 + 2.2 * 1,200 = 4,740.

6.
(a)
Answer: 430
Feedback: We have Cu = 54 – 40 = 14 and Co = 40 – 27 = 13. This gives the critical ratio
of 14/(13 + 14) = 0.5185. Using Table 13.4 and the round-up rule, this corresponds
to z = 0.1. The optimal order quantity is 400 + 0.1 * 300 = 430.

8
(b)
Answer: 2,088.91
Feedback: An order quantity of 380 corresponds to z = (380 – 400)/300 = -0.0667.
Using Table 13.4 and the round-up rule, we have I(0) = 0.3989. We multiply this by
the standard deviation of 300 to get the expected inventory of 119.67. The expected
sales are 380 – 119.67 = 260.33. The expected profit is 54 * 260.33 + 27 * 119.67 – 40
* 380 = 2,088.91.
(c)
Answer: 1,030
Feedback: According to Table 13.4, a 98% in-stock probability requires z = 2.1. This
yields an order quantity of 400 + 2.1 * 300 = 1,030.
(d)
Answer: 800
Feedback: In question 32, we determined that the optimal order quantity was 430.
This gives z = (430 – 400)/ 30 = 0.1. Using Table 13.4, we have I(0.1) = 0.4509. We
multiply this by the standard deviation of 300 to get the expected inventory of 135.27.
The expected sales are 430 – 135.27 = 294.73. The expected profit is 54 * 294.73 + 27
* 135.27 – 40 * 430 = 2,367.71. If we order 800 units, the discounted price will be 40
*(1 – 0.10) = 36. The order quantity of 800 corresponds to z = (800 – 400)/300 =
1.3333. Using Table 13.4 and the round-up rule, we have I(1.4) = 1.4367. We multiply
this by the standard deviation of 300 to get the expected inventory of 431.01. The
expected sales are 800 – 431.01 = 368.99. The expected profit is 54 * 368.99 + 27 *
431.01 – 36 * 800 = 2,762.73. Therefore, it makes sense to take advantage of the
quantity discount and order 800.

7.
(a)
Answer: 250
Feedback: The salvage value in this case is -5. We have Cu = 25 – 10 = 15 and Co = 10 –
(-5) = 15. This gives the critical ratio of 15/(15 + 15) = 0.5. This means that the order
quantity should be the mean of 250.

9
(b)
Answer: 0.8413
Feedback: An order quantity of 150 corresponds to z = (150 – 250)/100 = -1. Using
Table 13.4, we have F(-1) = 0.1587. The probability that the firm stocks out is 1 – F(-
1) = 0.8413.
(c)
Answer: 230.22
Feedback: An order quantity of 300 corresponds to z = (300 – 250)/100 = 0.5. Using
Table 13.4, we have I(0.5) = 0.6978. We multiply this by the standard deviation of 100
to get the expected inventory of 69.78. The expected sales are 300 – 69.78 = 230.22.
(d)
Answer: $764.65
Feedback: An order quantity of 400 corresponds to z = (400 – 250)/100 = 1.5. Using
Table 13.4, we have I(1.5) = 1.5293. We multiply this by the standard deviation of 100
to get the expected inventory of 152.93. Each unit costs $5 for disposal, so the total
expected disposal cost is 152.93 * 5 = 764.65.
(e)
Answer: 400
Feedback: Using Table 13.4 and the round-up rule, we need to have z = 1.5 to ensure
a 92% in-stock probability. This corresponds to an order quantity of 250 + 1.5 * 100
= 400.

8.
(a)
Answer: 288
Feedback: In Option 1, we have Cu = 100 – 65 = 35 and Co = 65 – 53 = 12. This gives
the critical ratio of 35/(12 + 35) = 0.7447. Using Table 13.4 and the round-up rule,
this corresponds to z = 0.7. The optimal order quantity is 200 + 0.7 * 125 = 287.5 
288.
(b)
Answer: 188

10
 Feedback: In Option 1, we have Cu = 100 – 55 = 45 and Co = 55 – 0 = 55. This gives the
critical ratio of 45/(55 + 45) = 0.45. Using Table 13.4 and the round-up rule, this
corresponds to z = -0.1. The optimal order quantity is 200 + (-0.1) * 125 = 187.5 
188.
(c)
Answer: Option 1
Feedback: We need to determine Land’s Start’s expected profit under each option. In
Option 1, I(0.7) = 0.8429, and the expected inventory is 0.8429 * 125 = 105.36. The
expected sales are 288 – 105.36 = 182.64. Land’s Start’s expected profit is 100 *
182.64 + 53 * 105.36 – 65 * 288 = 5,128.08. In Option 2, I(-0.1) = 0.3509, and the
expected inventory is 0.3509 * 125 = 43.86. The expected sales are 188 – 43.86 =
144.14. Land’s Start’s expected profit is 100 * 144.14 – 55 * 188 = 4,074.
(d)
Answer: $5,907.23
Feedback: An order quantity of 275 corresponds to z = (275 – 200)/125 = 0.6. Using
Table 13.4, I(0.6) = 0.7687. The expected inventory is 0.7687 * 125 = 96.09. This
represents the expected number of returns that Geoff will receive. His expected profit
is (65 – 25) * 275 – 53 * 96.09 = 5,907.23.

9.
(a)
Answer: 75
Feedback: The salvage value per bagel is 0.99/6 = 0.165, but only 2/3 of the bagels
are sold. This yields an effective salvage value of 0.165 * 2/3 = 0.11. We have C u = 0.60
– 0.20 = 0.40 and Co = 0.20 – 0.11 = 0.09. This gives the critical ratio of 0.40/(0.09 +
0.40) = 0.8163. Using Table 13.4 and the round-up rule, this corresponds to z = 1.0.
The optimal order quantity is 54 + 1 * 21 = 75.
(b)
Answer: 48.38

11
 Feedback: An order quantity of 101 corresponds to z = (101– 54)/ 21 = 2.2381. Using
Table 13.4 and the round-up rule, I(2.3) = 2.3037. The expected inventory is 2.3037 *
21 = 48.38.
(c)
Answer: 90
Feedback: Using Table 13.4 and the round-up rule, we see that a 95% in-stock
probability requires z = 1.7. The order quantity is 54 + 1.7 * 21 = 89.70  90.

10.
(a)
Answer: 18
Feedback: We have Cu = (4 + 0.60) – (2 + 0.05) = 2.55 and Co = (2 + 0.05) – 0.05 = 2.
This assumes that the soda maintains its value if the burrito is not sold; otherwise,
the overage cost would be 2.05. This gives the critical ratio of 2.55/(2 + 2.55) =
0.5604. Using Table 13.9 and the round-up rule, this corresponds to 18.
(b)
Answer: 6.18
Feedback: From Table 13.9, we have I(24) = 6.18.
(c)
Answer: 17.82
Feedback: From Table 13.9, we have I(24) = 6.18. The expected sales is 24 – 6.18 =
17.82.
(d)
Answer: 33.08
Feedback: From questions 49 and 50, the expected inventory is 6.18 and the expected
sales are 17.82. The expected profit is 4.60 * 17.82 + 0.05 * 6.18 – 2.05 * 24 = 33.08.
(e)
Answer: 0.0033
Feedback: From Table 13.9, we have F(30) = 0.9967. The probability that a customer
cannot purchase a burrito is 1 – F(30) = 0.0033.
(f)

12
 Answer: 28
Feedback: From Table 13.9 and the round-up rule, the order quantity that will achieve
at least a 98.5% in-stock probability is 28 (because F(27) = 0.9827 and F(28) =
0.9897).
(g)
Answer: 17
Feedback: The kiosk makes a profit of $0.50 on each Pop Tart and $0.55 on each soda.
This represents a profit of $1.05. On each burrito it makes a profit of $2 (and still
makes $0.55 on each soda). We still have Co = (2 + 0.05) – 0.05 = 2, but now Cu = 2.55
– 1.05 = 1.50. The critical ratio is 1.50/(2 + 1.50) = 0.4286. From Table 13.9 and the
round-up rule, this yields a quantity of 17.

11.
(a)
Answer: 0.5665
Feedback: If Larry books 2 slots, he will incur at least $40 in late fees if his demand is
for four or more slots. We can find this probability by taking 1 – F(3) = 1 – 0.4335 =
0.5665.

(b)
Answer: 7
Feedback: We have Cu = 20 – 1.5 = 18.5 and Co = 1.50. The critical ratio is 18.5/(1.5 +
18.5) = 0.925. Using Table 13.10 and the round-up rule, we can determine that the
quantity should be 7.
(c)
Answer: 1.41
Feedback: Using Table 13.10, I(5) = 1.41.
(d)
Answer: 11
Feedback: Using Table 13.10, we see that we need to reserve 11 slots to achieve at
least a 99.9% in-stock probability (because F(10) = 0.9972 and F(11) = 0.9991).

13