Question

A product with an annual demand of 1000 units has Co = $25.50 and Ch = $8. The demand exhibits some variability such that the lead-time demand follows a normal probability distribution with μ=25 and σ=5. a.What is the recommended order quantity? b. What are the recorder point and safety stock if the firm desires at most a 2% probability of stockout on any given order cycle? c. If a manager sets the reorder point at 30, what is the probability of a stockout on any given order cycle? How many times would you expect a stockout during the year if the reorder point were used?

Answer 1

a) Recommended order quantity = 79.84 = 80

b) recorder point = 35

Safety stock = 10

Safety stock cost = $0/year

ci) P(stock out/cycle) = 0.1587

cii) Number of stock outs/ year = 2

Explanation:

The pictures attached show a clear explanation of all the processes.