Mr. Beautiful, an organization that sells weight training sets, has an ordering

Question

Mr. Beautiful, an organization that sells weight training sets, has an ordering cost of $45 for the BB-1 set. (BB-1 stands for Body Beautiful Number 1.) The carrying cost for BB-1 is $10 per set per year. To meet demand, Mr. Beautiful orders large quantities of BB-1 5 times a year. The stockout cost for BB-1 is estimated to be $15 per set. Over the past several years, Mr. Beautiful has observed the following demand during the lead time for BB-1:

Demand During Lead Time Probability
Value 1 100 0.1
Value 2 120 0.2
Value 3 140 0.2
Value 4 160 0.2
Value 5 180 0.2
Value 6 200 0.1

The reorder point for BB-1 is 60 sets. What level of safety stock should be maintained for BB-1?

A. The optimal quantity of safety stock which minimizes expected total cost is ???? sets ( enter your response as a whole number)

Explanation / Answer

Reorder point for BB-1 = 60 sets.

The optimal quantity of safety stock, which minimizes expected total cost can be calculated as = *Total Cost = Carrying Cost + Stock out Cost = 0+ $45 x 4 x [.1(100-60)+.2(140- 60)+.2(180-60)] = 7920

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