Safety-Stock— Multiple-Choice:

a. Hancock Company wishes to determine the amount of safety stock that they should maintain for product no. 135 that will result in the lowest cost. Each stockout will cost $75. and the carrying cost of each unit of safety stock will be $1. Product no. 135 will be ordered five times a year. Which of the following will produce the lowest cost?

( 1 ) A safety stock of 10 units that is associated with a 40 percent probability of running out of stock during an order period.

(2) A safety stock of 20 units that is associated with a 20 percent probability of running out of stock during an order period.

(3) A safety stock of 40 units that is associated with a 10 percent probability of running out of stock during an order period.

(4) A safety stock of 80 units that is associated with a 5 percent probability of running out of stock during an order period.

b. Polly Company wishes to determine the amount of safety stock that it should maintain for product D that will result in the lowest costs. The following information is available:

The options available to Polly are as follows:

The number of units of safety stock that will result in the lowest cost is:

(1) 20. (2) 40. (3) 50. (4) 55.

Transcribed Image Text:

Stockout cost Carrying cost of safety stock Number of purchase orders $80 per occurrence $2 per unit 5 per year