Can the optimal stocking level in the single-period model ever be less than expected demand?
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Can the optimal stocking level in the single-period model ever be less than expected demand? Explain briefly |
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The stock, which neither proves to be excess nor the shortage for the organization, is known as the optimal stocking level.
Explanation
Since the perishable goods can deteriorate easily, there is sometimes high cost of deterioration involved in it which is known as excess cost and if this is higher than the cost of shortage that will incur in the form of the opportunity cost of not earning the profit, then in that situation the optimal stocking level will be lower than the expected demand of the same.
Verified Answer
The excess cost which needs to be borne by the company matters, and if this is higher than the cost of shortage as in the situation of perishable goods, then the stocking level should be maintained at less than the optimal level.
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