3. The ICU Optical Clinic has recently introduced a new line of eyeglasses that incorporates a highly fashionable frame and special lenses that darken in sunlight and lighten indoors, thus eliminating the need to purchase a separate pair of sunglasses. ICU purchases frames for the glasses from an outside vendor. The lenses are manufactured on site. The clinic has recently noted the following demand distribution for its new glasses:

Demand/month Probability 12 0.10 13 0.15 14 0.15 15 0.20 16 0.20 17 0.10 18 0.05 19 0.05 Purchase price to the ICU Optical Clinic is $30 per frame. The clinic has an ordering cost of $25.

Cost of carrying inventory is 25 percent of the item value per unit per year. Order lead time is constant at one month. The work year consists of 12 months.

a. Compute the economic order quantity for the frames ICU purchases.

b. Compute the reorder point and buffer stock level for a 99 percent customer service level.

Assume order quantity and reorder point can be computed independently.

c. What’s the total annual cost of carrying the buffer stock computed in part b?

442 Chapter 11 Order Point Inventory Control Methods