Question

Foster Drugs, Inc., handles a variety of health and beauty aid products. A particular hair conditioner product costs Foster Drugs $2.95 per unit. The annual holding cost rate is 20%. An order-quantity, reorder point inventory model recommends an order quantity of 300 units per order. （1） Lead time is one week, and the lead-time demand is normally distributed with a mean of 150 units and a standard deviation of 40 units. What is the reorder point if the firm is willing to tolerate a 1% chance of stock-out on any one cycle?

Answer 1

Answer:

ROP = 150*1+(2.326*40*1) = 243.04 = 243 units (approx)

Explanation:

Given information -

c = 2.95 $/unit

Annual holding cost = 0.2*2.95 = 0.59 $/unit

Q = 300 units (EOQ)

L = 1 week

Mean demand = 150 units/week

σ= 40 units/week

z = 2.326 at 99 percent service level (1% stock out)

a) Reorder point = Average daily demand + Safety stock = dL+(z σ*\sqrt{L})

ROP = 150*1+(2.326*40*1) = 243.04 = 243 units (approx)