Question

Furnco sells secretarial chairs. Annual demand is normally distributed, with mean of 1,040 chairs and standard deviation of 50.99 chairs. Furnco orders its chairs from its flagship store. It costs $100 to place an order, and the lead time is two weeks. Furnco estimates that each stock out causes a loss of $50 in future goodwill. Furnco pays $60 for each chair and sells it for $100. The annual cost of holding a chair in inventory is 30% of its purchase cost.

a Assuming that all demand is backlogged, what are the reorder point and the safety stock level?
b Assuming that all stockouts result in lost sales, determine the optimal reorder point and the safety stock level.

Answer 1

Reorder point is 40

Step-by-step explanation:

Reorder point is the level of inventory which trigger the purchase of new inventory.

The formula for Reorder point is

Annual demand * Leadtime + Safety Stock

Reorder Point = 1040 / 365 * 14 days + 0

= 40.

The lost sales cost is $50 in goodwill, Furnco should keep a safety stock of at least 30 chairs in order to meet demand level.