Lewis University has a Flyers Apparel Store that sells Flyer's T-shirts, sweatshirts, hoodies, jerseys, hats, and long-sleeve shirts. The manager of this store is trying to find the optimal service level for its store items. Suppose the Flyers Apparel Store shares the following information with you. He says, the average demand for items is 500, standard deviation is 50, price per unit is 200 and per unit cost is 75. The disposal value is 55 and the holding cost per unit is 5.

What is the cost of understocking ?

A) 125

B) 120

C) 115

D) 135

E) 110

To determine the cost of understocking, we can use the following formula:

\[
\text{Cost of understocking (Cu)} = \text{Selling Price} - \text{Cost Price}
\]

Where:
- Selling Price (Price per unit) = 200
- Cost Price (Per unit cost) = 75

Now, let's calculate the cost of understocking:

\[
Cu = 200 - 75 = 125
\]

The cost of understocking is **125**.

So, the correct answer is:

**A) 125**

Would you like any further explanation or have any questions?

Here are 8 related questions to expand on this topic:
1. How would you calculate the cost of overstocking in this scenario?
2. What is the optimal order quantity for the store?
3. How can the standard deviation of demand impact the service level?
4. What is the formula for the service level in inventory management?
5. How does the disposal value affect the cost of overstocking and understocking?
6. What is the Economic Order Quantity (EOQ) model?
7. How would you calculate the total cost, including holding costs, in this scenario?
8. What role does the holding cost play in inventory management decisions?

**Tip:** To minimize costs in inventory management, always balance the cost of understocking with the cost of overstocking while considering demand variability.

Explore how to calculate the cost of understocking in inventory management using the given selling price, cost price, and other related factors. Understand the impact of inventory levels on costs and learn practical methods to optimize inventory service levels. Suitable for undergraduate students and professionals.

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