6/20/2020 answer - 2020-06-12T075641.967.

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Question:

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

a
replicas sell for $20 each, and B&S uses a 15% annual inventory holding cost rate. Ordering costs are $5 per order, and

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demand during the lead time follows a normal probability distribution with μ = 15 and σ = 6.

d
a. What is the recommended order quantity?

re
ha
b. If B&S is willing to accept a stock-out roughly twice a year, what reorder point would you recommend? What
is the probability that B&S will have a stock-out in any one order cycle?

s
as
c. What are the safety stock and annual safety stock costs for this product?

w
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Answer : co rc
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(a) The optimal order quantity is the amount of supplies that should be ordered from a supplier to reduce the total annual cost
se dy

to a business. When probability is normally distributed the optimal order quantity is given as the square root of the product of
the number 2 and the demand times the ordering cost per unit divided by the holding cost per unit. Here is the equation:
ur stu
H
is
Th

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The variable Q* is the optimal order quantity, D is the demand, is the ordering cost, and is the holding cost.

a
Calculate the optimal order quantity when the demand is for 300 units a week per year, the ordering cost is $5, the holding cost

vi
is 15% of $20:

d
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s ha
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The optimal order quantity for the store is 31.62 units.

m e
co rc
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(b) The reorder point is when a new order should be placed for supplies due to the inventory level. To determine the reorder
point if the store will allow two stock-outs a year the amount of orders placed a year must be known. The store has a demand
of 300 and currently orders 31.62 units at a time. Calculate how many orders are placed a year as demand divided by order
se dy

quantity:
ur stu
H
is
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a
vi
d
If 9.49 orders are placed a year and the store will accept two stock-outs then the probability of a stock-out is 2 divided by the

re
amount of orders a year. Calculate the probability of a stock-out as 2 divided by the amount of orders a year:

s ha
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co rc
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The probability of one stock-out a year is 0.2108. The remainder of the probability is that there will not be any stock-outs.
Calculate the probability or no stock-outs as 1.000 minus the probability of a stock-out:
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se dy
ur stu
H

Referencing the uniform probability distribution table, the corresponding z value for a cumulative probability of 0.7892 is
is

0.80. The reorder point is a function of the z value, so the z value can be used to determine the new reorder point. When
Th

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probability is normally distributed the equation for reorder point is given as the mean demand plus the product of the z value
and the standard deviation. Here is the equation:

The variable r is the reorder point, z is the z value, is the mean demand, and is the standard deviation.

a
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d
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Calculate the reorder point when the mean demand is 15 units and the standard deviation is 6 units:

s ha
as
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Since the items being discussed are whole items the number should be rounded up. The reorder point is 19.8 units.

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(c) Safety stock is extra inventory that is kept on hand to reduce the number of stock-outs during periods of higher than
expected demand. Safety stock is the reorder point minus the mean demand. Calculate the safety stock:
se dy
ur stu
H
is

The safety stock is 5 units.

Th

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Calculate the extra cost of the safety stock as the safety stock amount times the holding cost per unit:

a
vi
The extra cost due to the safety stock is $15.

d
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s ha
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co rc
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se dy
ur stu
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