Suppose you have been assigned as the production manager of a new line of men’s blazers with a target delivery date within 3 weeks. Your market analysts claim that the market can easily bear the price of $120 per blazer. Production costs stand at $40, since it is sourced locally. They expect demand to be about 500 units with a standard deviation of 100. Any unsold blazers will be salvaged at discount stores for $20 per piece.
A) In the event of a stock out, customers can occasionally become hostile and complain to their friends, which adversely affect the reputation of the brand. Management calls this phenomenon the cost of good-will and assigned it a value of $20, for each time a stock out happens. Should the good-will cost be included in shortage cost or excess cost?