Service Management 7th Edition by James Fitzsimmons, Mona Fitzsimmons

Exercise 6

The A M Hobby Shop carries a line of radio-controlled model racing cars. Demand for these cars is assumed to be a constant rate of 40 cars per month. The cars cost $60 each, and ordering costs are approximately $15 per order regardless of the order size. Inventory carrying costs are 20 percent annually.
a. Determine the EOQ and total annual costs under the assumption that no back orders are permitted.
b. Using a $45-per-unit-per-year backorder cost, determine the minimum cost inventory policy and total annual cost.
c. What is the maximum number of days a customer would have to wait for a backorder under the policy in part b? Assume the hobby shop is open for business 300 days per year.
d. Would you recommend a no-backorder or a backorder inventory policy for this product? Explain.
e. If the lead time is 6 days, what is the reorder point in terms of on-hand inventory for both the no-backorder and the backorder inventory policies?