An Introduction to Management Science 13th Edition by David Anderson,Dennis Sweeney ,Thomas Williams ,Jeffrey Camm, Kipp Martin

Exercise 8

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 ? = 15 and ? = 6.
a. What is the recommended order quantity?
b. If B S is willing to accept a stockout roughly twice a year, what reorder point would you recommend? What is the probability that B S will have a stockout in any one order cycle?
c. What are the safety stock and annual safety stock costs for this product?