Homework 05

Problem 8
Billy's Bakery bakes fresh bagels each morning. The daily demand for bagels is a random variable with a
distribution estimated from prior experience given by

The bagels cost Billy's 8 cents to make, and they are sold for 35 cents each. Bagels unsold at the end of
the day are purchased by a nearby charity soup kitchen for 3 cents each.

a) Based on the given discrete distribution, how many bagels should Billy's bake at the
start of each day? (Your answer should be a multiple of 5.)
b) If you were to approximate the discrete distribution with a normal distribution, would
you expect the resulting solution to be close to the answer that you obtained in part (a)?
Why or why not?
c) Determine the optimal number of bagels to bake each day using a normal
approximation. (Hint: You must compute the mean and the variance of the demand
from the given discrete distribution.)

Problem 10
Happy Henry's car dealer sells an imported car called the EX123. Once every three months, a shipment
of the cars is made to Happy Henry's. Emergency shipments can be made between these three-month
intervals to resupply the cars when inventory falls short of demand. The emergency shipments require
two weeks, and buyers are willing to wait this long for the cars, but will generally go elsewhere before
the next three-month shipment is due.

From experience, it appears that the demand for the EX 123 over a three-month interval is normally
distributed with a mean of 60 and a variance of 36. The cost of holding an EXI23 for one year is $500.
Emergency shipments cost $250 per car over and above normal shipping costs.

a) How many cars should Happy Henry's be purchasing every three months?
 b) Repeat the calculations, assuming that excess demands are back-ordered from one
three-month period to the next. Assume a loss-of-goodwill cost of $100 for customers
having to wait until the next three-month period and a cost of $50 per customer for
bookkeeping expenses.
c) Repeat the calculations, assuming that when Happy Henry's is out of stock of EX123s,
the customer will purchase the car elsewhere. In this case, assume that the cars cost
Henry an average of $10,000 and sell for an average of $13,500, Ignore loss-of-goodwill
costs for this calculation.

Problem 13
An automotive warehouse stocks a variety of parts that are sold at neighborhood stores. One particular
part, a popular brand of oil filter, is purchased by the warehouse for $1.50 each. It is estimated that the
cost of order processing and receipt is $100 per order. The company uses an inventory carrying charge
based on a 28 percent annual interest rate.

The monthly demand for the filter follows a normal distribution with mean 280 and standard deviation
77. Order lead time is assumed to be five months.

Assume that if a filter is demanded when the warehouse is out of stock, then the demand is back-
ordered, and the cost assessed for each back-ordered demand is $12.80. Determine the following
quantities:

a) The optimal values of the order quantity and the reorder level.
b) The average annual cost of holding, setup, and stock-out associated with this item
assuming that an optimal policy is used,
c) Evaluate the cost of uncertainty for this process, That is, compare the average annual
cost you obtained in part (b) with the average annual cost that would be incurred if the
lead time demand had zero variance.

Problem 16
Suppose that in Problem 13 the stock-out cost is replaced with a Type I service objective of 95 percent.
Find the optimal values of (Q,R) in this case.

Problem 17
Suppose that in Problem 13 a Type 2 service objective of 95 percent is substituted for the stock-out cost
of$ 12.80. Find the resulting values of Q and R. Also, what is the imputed cost of shortage for this case?