On the newsboy model with a cuto transaction size

In this paper we analyse the e ect of a cuto transaction size in a simple newsboy setting. It is assumed that customers with an order larger than a prespeci ed size are satis ed in an alternative way, against additional cost. For compound Poisson demand with discrete order sizes, we show how to determine the average cost and an optimal cuto transaction size. Because the computational e ort to calculate the exact cost is quite large, we also consider an approximative model. By approximating the distribution of the total demand during a period by the normal distribution one can determine an expression for the average cost function that depends on the cuto transaction size only. A main advantage of this approximation is that we can solve problems of any size. The quality of using the normal approximation is evaluated through a number of numerical experiments, which show that the approximative results are satisfactory.