Suppose you run a small ceramics shop that sells drinking mugs and other items. The demand for the mugs is 5,000 per year, and is steady throughout. Each time you order a shipment of mugs, the delivery cost plus other administrative costs total $100. To hold a mug in inventory for one year costs $1.50. The lead time necessary is three days (assume 250 days to the year).

(a.) Write down the values of the relevant parameters in order to set this problem up for solution.

(b.) Find the economic order quantity for this operation.

(c.) What is your total (average) annual holding plus ordering cost? (Write these out in detail.)

1. How many days does each order last?

1. The demand over the three day lead time is 60 units.

1. Verify the 60 unit demand over the lead time.

1. Suppose the standard deviation of demand over the three day lead time is 10 units. In conjunction with your answer in part (b.), please show what the reorder point will be to achieve a 95% service level. (Display the relevant calculations.)