Exercise 15.

2 (Homework)

Deep Six Seafood, a restaurant that is open 360 days a year, specializes in fresh Maine
lobsters at a cost of $10 each. Air freight charges have increased significantly, and
it now costs Deep Six $48 to place an order. Because the lobsters are shipped live
in a saltwater tub, the order cost is not affected by order sizes. The cost to keep a
lobster alive until needed runs about $0.02 per day. The demand for lobsters
during the 1-day lead time is as follows: jajaajaajaj
Lead-Time Demand Probability

0 .05

1 .10

2 .20

3 .30

4 .20

5 .10

6 .05

a. Deep Six would like to reconsider its order size. What would you recommend as
an EOQ?
So if the expected demand per day is
(0*0.05)+(1*0.1)+(2*0.2)+(3*0.3)+(4*0.2)+(5*0.1)+(6*0.05) = 3 (lobsters per day)
Then annual demand is 3*360 = 1080 (lobsters per year)
Holding cost so lobster stays alive price is 0.02 per day, so for year it is 0.02*360 = $7.2

EOQ = SQRT (2 * quantity * cost per order) / Holding cost

2∗1080∗48 = 120 lobsters (order size).
Therefore, EOQ =
√
What we can consider:
7.2

Ordering cost would be 120*$48 = $5760

Average inventory would be (0+120)/2 = 60
Holding costs 60*$7.2 = $432

b. The Maine distributor is willing to give Deep Six a $0.50 discount on each
lobster if orders are placed in lots of 360 each. Should Deep Six accept this
offer?
Holding cost from the offer would be (0+360)/2*$7.2 = $1296
What is the amount we would save from discount = $0.5*1080 = $540
Holding cost due to increased size would be $1296-$432 = $864
Profits/loss would be $540-$864 = -$324
Therefore, we consider this offer as not profitable, so we don’t accept this offer.
c. If Deep Six insists on maintaining a safety stock of 2 lobsters, what is the
service level?