Question

A distributor of large appliances needs to determine the order quantities and reorder points for the various products it carries. The following data refer to a specific refrigerator in its product line:
Cost to place an order $100
Holding cost 20 percent of product cost per year
Cost of refrigerator $500 each
Annual demand 500 units
Standard deviation during lead time 10
Lead time 7 days

Consider an even daily demand and a 365-day year.

a. What is the economic order quantity?
b. If the distributor wants a 97 percent service probability, what reorder point, R, should be used?

Answer 1

Answer:

a. 32 refrigerators

b. 29 refrigerators

Explanation:

a. The computation of the economic order quantity is shown below:

$= \sqrt{\frac{2\times \text{Annual demand}\times \text{Ordering cost}}{\text{Carrying cost}}}$

$= \sqrt{\frac{2\times \text{500}\times \text{\ 100}}{\text{\ 100}}}$

= 32 refrigerators

The carrying cost is come from

= $500 × 20%

= $100

b. And, the reorder point is

= Annual demand ÷ total number of days in a year × lead time + service level × Standard deviation during lead time

= 500 ÷ 365 days × 7 days + 1.90 × 10

= 29 refrigerators