Question

Annual demand for number 2 pencils at the campus store is normally distributed with mean 1,000 and standard deviation 250. The store purchases the pencils for 6 cents each and sells them for 20 cents each. There is a two-month lead time from the initiation to the receipt of an order. The store accountant estimates that the cost in employee time for performing the necessary paperwork to initiate and receive an order is $20, and recommends a 22 percent annual interest rate for determining holding cost. The cost of a stock-out is the cost of lost profit plus an additional 20 cents per pencil, which represents the cost of loss of goodwill. (a) Find the optimal value of the reorder point R assuming that the lot size used is the EOQ

Answer 1

To find the optimal value of the reorder point R assuming that the lot size used is the EOQ, use the EOQ formula and consider the holding cost and stock-out cost.

Step-by-step explanation:

To find the optimal value of the reorder point R assuming that the lot size used is the Economic Order Quantity (EOQ), we need to consider the holding cost and stock-out cost. The EOQ formula can be calculated using the following formula:

EOQ = √((2DS)/H)

Where D is the annual demand, S is the setup (ordering) cost, and H is the holding (carrying) cost per unit. In this case, the annual demand for number 2 pencils is normally distributed with a mean of 1,000 and a standard deviation of 250. Based on the given information, the cost of employee time for paperwork is $20, and the interest rate for holding cost is 22% per year.