Daily demand for packages of five videotapes at a warehouse store is found to be
ID: 463071 • Letter: D
Question
Daily demand for packages of five videotapes at a warehouse store is found to be normally distributed with mean 50 and standard deviation 5. When the store orders more tapes, the ordering cost $42 and orders take 4 days to arrive. Each pack of tapes costs $7.20 and there is a 24% annual holding cost tor inventory. Assume the store is open 360 days a year. a. What is the EOQ? b. If the store wants the probability of stocking out to be no more than 5%, and demand each day is independent of the day before, what reorder point should be set? c. How much of your reorder point in) is safety stock?Explanation / Answer
A.
Annual Demand = daily demand * 360 = 50*360 = 18000
Holding cost = 7.2*24% = $1.728
Ordering cost = $42
Economic Order Quantity (EOQ) = ((2*Annual demand*ordering cost)/holding cost)^.5
EOQ = ((2*18000*42)/1.728)^.5 = 935.42 or 935 packets of tape
B.
Reorder point = Daily demand*Lead time + Z*SD*(Lead Time)^.5
At 5% chance (stock out), value of Z = 1.65 (As per Z table)
Reorder point = 50*4 + 1.65*5*(4)^.5
Reorder point = 216.5 or 217 packets
C.
Safety stock = Z*SD*(Lead Time)^.5 = 1.65*5*(4)^.5 = 16.5 or 17 packets
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