A product with an annual demand of 1000 units has Co 5 $25.50 and Ch 5 $8. The demand exhibits some variability such that the lead-time demand follows a normal probability distribution with 5 25 and 5 5.

a. What is the recommended order quantity?

b. What are the reorder point and safety stock if the firm desires at most a 2% probability

of stock-out on any given order cycle?

c. If a manager sets the reorder point at 30, what is the probability of a stock-out on any

given order cycle? How many times would you expect a stock-out during the year if

this reorder point were used?

32. The B&S Novelty and Craft Shop in Bennington, Vermont, sells a variety of quality handmade items to tourists. B&S will sell 300 hand-carved miniature replicas of a Colonial

soldier each year, but the demand pattern during the year is uncertain. The replicas sell

for $20 each, and B&S uses a 15% annual inventory holding cost rate. Ordering costs are

$5 per order, and demand during the lead time follows a normal probability distribution with 5 15 and 5 6.

a. What is the recommended order quantity?

b. If B&S is willing to accept a stock-out roughly twice a year, what reorder point would

you recommend? What is the probability that B&S will have a stock-out in any one

order cycle?

c. What are the safety stock and annual safety stock costs for this product?