Question

A service station uses 1,200 cases of oil a year. Ordering costs is $40 and annual carrying cost is $3 per case. The station owner has specified an annual service level of 99%. A. What is the optimal order quantity? B. What level of safety stock is appropriate if lead time demand is normally distributed with a mean of 80 cases and a standard deviation of 6 cases?

Answer 1

a) 179 cases

b) 14 cases

Step-by-step explanation:

EOQ = √(2SD/H)

D = annual demand = 1,200

S = order cost = 40

H = holding cost per unit = 3

EOQ = √[(2 x 1,200 x 40)/3] = 178.89 = 179 cases

z for 99% service level = 2.33

safety stock = 2.33 x 80 x (6/80) = 13.98 - 14 cases