stochastic inventory

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Question description

A.  Milk is stocked at a grocery shop each week. At the end of the week, unsold milk is sold for 30% the original price and always sells at this lower price instantly. Demand for milk is normal and the shop buys milk at $2 per gallon. The shop has an ideal service level of 95%.

  i.  Write the cost of underage (Cu) using the information above.

  ii.  Write the cost of overage (Co) using the information above.

  iii.  Write the ideal service level F(Qo), using the answers to (i) and (ii) above, plus additional information in the question, if any.

  iv.  Find the selling price for a gallon of milk.

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