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28 January, 10:03

A newsvendor acquired 600 copies of a newspaper in the morning, sold 465 of them and then disposed of the rest of the newspapers at the end of the day? for a disposal fee. The costs of underage and overage are?

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  1. 28 January, 12:35
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    Underage costs are the cost of suffering a shortage, and they are calculated by subtracting the unit cost form the selling price. Underage costs = unit price - unit cost

    Overage costs are the costs of producing one unit.

    Underage cost = price - overage cost

    Explanation:

    Suppose that the newsvendor pays $1 for each newspaper and sells them for $2.50. The overage cost = $1 per newspaper x 600 newspapers = $600

    The underage cost = selling price - overage cost = $2.50 - $1 = $1.50

    If the newsvendor sold 465 newspapers and disposed 135, his profit will be:

    (465 x $1.50) - (135 x $1) = $697.50 - $135 = $562.50
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