Question

G Chairish-Is-The Word, Inc., manufactures top-end hardwood chairs that are sold through a variety of retail outlets. The most popular model sells (wholesale) for $400 per chair and costs $300 to make. Past data show that average monthly demand is 1,000 chairs with a standard deviation of 200 chairs and that the normal distribution is a reasonable fit. CITW uses a 20 percent annual interest charge to estimate inventory carrying costs, so that the cost to carry one chair in stock for 1 month is $300(0.20)/12 = $5.

If all orders are backlogged and the cost of lost customer goodwill from carrying a single chair on backorder is $20, what order-up-to (base stock) level should CITW use?

Answer 1

Explanation:

If all orders are backlogged and the cost of lost customer goodwill from carrying a single chair on backorder is $20, what order-up-to (base stock) level should CITW use?

Company has mean demand = 1000

Standard deviation = 200 chairs

95% service level, Z=1.64 ⇒ 1000 - 1.64 * 200 = 1000 – 328 =672 chairs.

The order up to base model is 672 chairs.