Cost of incorrect safety stock The demand for Loraine Company's room ionizer is esti- mated at 200 units per day. The unit selling price is $92 and unit cost is $80. The owner of the company likes to keep a safety stock of 400 units on hand. He says, "I estimate the chance of a 1-day stockout is 25 percent and the chance of being out of stock for two days is about 10 percent without a safety stock. With daily sales of $18,400, I cannot afford a stockout." The cost of carrying units in inventory is 15 percent of product cost.

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REQUIRED a. Compute the expected stockout cost and determine the cost of carrying excess safety stock. b. Compute the optimal safety stock for the ionizer.