A company recently lowered its service performance from 99 percent product availability to 97 percent product availability.The change saved the company exactly $1 million per year in inventory carrying cost.Senior management now wants to lower the service level to 95 percent from 97 percent.Such a further change is likely to save:
A)Less than $1 million.
B)Exactly $1 million.
C)More than $1 million.

Question

Quizplus · Accepted Answer

The savings from going from 99% to 97% product availability was $1 million. However, going from 97% to 95% product availability is not likely to result in the same savings. The cost savings will likely be less than $1 million since there are diminishing returns as the service level decreases. Therefore, the best answer is A)Less than $1 million.

A Company Recently Lowered Its Service Performance from 99 Percent