The Polly Company wishes to determine the amount of safety stock that it should

Question

The Polly Company wishes to determine the amount of safety stock that it should maintain for Product D that will result in the lowest cost. The following information is available

Stockout cost $80 per occurrence
Carrying cost of safety stock $ 2 per unit
Number of purchase orders 5 per year

The available options open to Polly are as follows:

Units of safety stock Probability of running
out of safety stock
10 50%
20 40%
30 30%
40 20%
50 10%
55 5%

The number of units of safety stock that will result in the lowest cost is
A: 20
B: 40
C: 50
D: 55

Explanation / Answer

Stockout cost $80 per occurrence Carrying cost of safety stock $ 2 per unit Number of purchase orders 5 per year Safety Stock Carrying Cost Stockout % Stockout cost Total Cost SS 2*SS X Y = X*80 X + Y 20 40 40 32 72 40 80 20 16 96 50 100 10 8 108 55 110 5 4 114 Hence number of units of safety stock that will result in the lowest cost is 20.

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