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?

Question

Business

Gabrielle

1 June, 21:16

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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Kelvin Christensen · Answer 1

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