According to the Financial Department, the cost for a short waiting of a customer is $20. When there are: backorder, lost sales, lost customers, the costs are: $40, $100, $600 respectively. Y

Figures calculated by the Marketing Department for the last year show the following:

1. 20% of all stock-outs result in short waiting of a customer.

2. 50% of all stock-outs result in a back order.

3. 20% of all stock-outs result in a lost order.

4. 10% of all stock-outs result in a lose of a customer.

Questions:

1. What is the average cost of a stock-out?
2. How much should we invest in inventory to reduce the number of stock-outs from 1000 a year to only 200 per year?

Please show your work as i need to understand how to answer the question as this is a practice question for my exam