A company has average demand of 30 units per day. Lead time from the supplier averages 7 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. Suppose management decides it wants to offer a 95 percent service level. That is, it is willing to experience a stockout probability of 5 percent during the order cycle. What is the annual cost of this safety stock policy?
A)$82.50
B)$87.50
C)$115.00
D)$62.50

Question

A company has average demand of 30 units per day. Lead time from the supplier averages 7 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.  Suppose management decides it wants to offer a 95 percent service level. That is, it is willing to experience a stockout probability of 5 percent during the order cycle. What is the annual cost of this safety stock policy?
A)$82.50 
B)$87.50 
C)$115.00 
D)$62.50

Quizplus · Accepted Answer

A 95 percent service level is 1.65 standard deviations. 1.65 × 20 = 33. Therefore, (33 units × $10 × .25) = $82.50

A Company Has Average Demand of 30 Units Per Day