Table 1
Jackson Enterprises uses a fixed order quantity inventory control system. The firm operates 50 weeks per year and has the following characteristics for an item:
Demand $ =20,000 $ units/year
Ordering cost $ =\$ 45 / $ order
Inventory-carrying cost as a percent of item value $ =25 \% $
Item (Unit) value $ =\$ 20 $
Lead time $ =5 $ weeks
Standard deviation in weekly demand $ =125 $ units
-Using the information in Table 1, if the service level is 96 percent, what is the reorder point?
A) Less than or equal to 2,800 units
B) Greater than 2,800 but less than or equal to 3,200 units
C) Greater than 3,200 but less than or equal to 3,600 units
D) Greater than 3,600 units

Question

Quizplus · Accepted Answer

The reorder point is 2,800 units. This is calculated using the formula: Reorder point = (Demand during lead time) + (Safety stock). The demand during lead time is 5 weeks * 20,000 units/year / 50 weeks/year = 2,000 units. The safety stock is calculated using the formula: Safety stock = Z * (Standard deviation in weekly demand) * (Lead time). The Z-score for a service level of 96 percent is 2.05. Therefore, the safety stock is 2.05 * 125 units * 5 weeks = 800 units. The reorder point is therefore 2,000 units + 800 units = 2,800 units.

Table 1 Jackson Enterprises Uses a Fixed Order Quantity Inventory =20,000 =20,000 =20,000

Table 1
Jackson Enterprises Uses a Fixed Order Quantity Inventory $=20,000$