Tobacco is shipped from North Carolina to a cigarette manufacturer in Cambodia o

Question

Tobacco is shipped from North Carolina to a cigarette manufacturer in Cambodia once a year. The reorder point, without safety stock, is 200 kilos. The carrying cost is $20 per kilo per year, and the cost of a stockout is $70 per kilo per year. Given the following demand probabilities during the lead time, how much safety stock should be carried?
Demand During Lead Time(Kilos) Probability

0 ................... .....................................0.1
100 ......................................................0.1
200 ..................................................... 0.2
300 ................... ..................................0.4
400 ................... ..................................0.2

The optimal quantity pf safety stock which minimizes expeted total cost is ____ kilos (enter anwser as a whole number).

Explanation / Answer

The expected number of demand based on the Mathematical expectation of the given data

0*0.1+100*0.1+200*0.2+300*0.4+400*0.2= 250

Presently company is ordering for 200 units at a time but the expected demand is 250. Hence the company must maintain an additional stock of 50 as Safety stock

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