A company has average demand of 30 units per day.Lead time from the supplier averages seven days.Assume that the combined standard deviation of demand during lead time has been calculated and is equal to 20 units.One unit costs $10 and the inventory carrying cost is 25 percent. 1 standard deviation covers 84.13%
1)04 standard deviations covers 85%
1)28 standard deviations covers 90%
1)65 standard deviations covers 95%
1)96 standard deviations covers 97.5%
2 standard deviations covers 97.72%
2)33 standard deviations covers 99%
3 standard deviations covers 99.86%
6 standard deviations covers 99.99966%
What is the reorder point for the company if it decides on a 99 percent service level?

Question

Quizplus · Accepted Answer

The formula for reorder point with safety stock is: 
Reorder Point = (Average Demand during Lead Time x Lead Time) + Safety Stock

First, we need to calculate the safety stock using the standard deviation of demand during lead time and the desired service level.

From the given data, we know: 
Average Demand during Lead Time (D) = 30 units 
Lead Time (L) = 7 days 
Standard Deviation of Demand during Lead Time (σ) = 20 units 
Service Level = 99%

Using the table provided, we can find that the z-value for 99% service level is 2.33.

Next, we can use the formula: 
Safety Stock = z-value x σ

Thus, Safety Stock = 2.33 x 20 = 46.6 units

Plugging in the values in the reorder point formula, we get: 
Reorder Point = (30 x 7) + 46.6 
Reorder Point = 256.2

Rounding up to the nearest whole number, the reorder point = 257 units. Therefore, the best choice is B.

A Company Has Average Demand of 30 Units Per Day