Scenario 9.7
Cranium, Inc., purchases term papers from an overseas supplier under a continuous review system. The average demand for a popular mode is 300 units a day with a standard deviation of 30 units a day. It costs $60 to process each order and there is a five-day lead-time. The holding cost for a paper is $0.25 per year and the company policy is to maintain a 98% service level. Cranium operates 200 days per year.
-Use the information in Scenario 9.7. If lead-time increases by three days, what is the reorder point needed to maintain a 98% service level?
A) less than or equal to 2,400 units
B) greater than 2,400 units but less than 2,500 units
C) greater than 2,500 units but less than 2,600 units
D) greater than 2,600 units

Question

Quizplus · Accepted Answer

First, we need to calculate the safety stock by using the formula: 
Safety stock = z-score x standard deviation of demand during lead time 
= 2.05 x 30
= 61.5 
Next, we can calculate the reorder point by using the formula 
Reorder point = (average demand per day x lead time) + safety stock 
= (300 x 8) + 61.5 
= 2,461.5 
Since the reorder point is greater than 2,500 but less than 2,600, the answer is C.

Scenario 9.7 Cranium, Inc., Purchases Term Papers from an Overseas Supplier Under