Applying Critical Ratio in Retail

Book store selling School Text Books

Situation

Delta Book Store is a store inside the premises of Delhi Public School Noida, dealing in CBSE course
text books. Mr Suraj Verma, owner of Delta, gets all his books by visiting Nai Sarak(Delhi) in the
month of February every year. As all students buy books for the year in March, hence he must stock
his inventory at one go in Feb. The estimated demand for School books is normally distributed with
mean of 20000 and a standard deviation of 3000. The (average) selling price is r= Rs.350 per book.
The (average) cost of each book is c= Rs.100 per book. All unsold books are returned back to the
whole-seller at the end of the year for an average value of s= Rs.50 per book. Also, if a customer is
denied a sale due to stock-out, a discount coupon worth Rs.10 per book is given to the customer as
a goodwill gesture.
We need to determine the optimal quantity that Mr. Verma should buy when he visits Nai Sarak in
the coming year.





Solution
Cost of not being able to sell a book due to stock out, Underage Cost, C
u
= r c + p = 350 -100 +10
C
u
= Rs.260

Cost of one unsold book due to overstocking, Overage cost () C
o
= c - s = 100-50 = Rs.50

Critical ratio, R = C
u
/(C
o
+ C
u
) = 260/(260+50) = 260/310 = 0. 8387

Therefore, Critical ratio = 83.87%

Since Demand is normally distributed with a mean of 20000 books and a standard deviation of
3000, optimum order quantity, Q = NORM.INV(0.8387, 20000, 3000) = 22968 books

Therefore Mr Suraj should buy 22968 books in February.