A distributor of large appliances needs to determine the order quantities and re

Question

A distributor of large appliances needs to determine the order quantities and reorder points for the various products it carries. The following data refer to a specific refrigerator in its product line:

Consider an even daily demand and a 365-day year.

a. What is the economic order quantity? (Round your answer to the nearest whole number.)

b. If the distributor wants a 90 percent service probability, what reorder point, R, should be used? (Use Excel's NORMSINV() function to find the correct critical value for the given -level. Do not round intermediate calculations. Round "z" value to 2 decimal places and final answer to the nearest whole number.)

Cost to place an order $ 50 Holding cost 20 percent of product cost per year Cost of refrigerator $ 400 each Annual demand 540 refrigerators Standard deviation of demand during lead time 8 refrigerators Lead time 13 days

Explanation / Answer

Ordering Cost = $50

Holding Cost = 0.20

Annual Demand = 540

Price = $400

Z at 90% = 1.28

Daily Demand = 540/365 = 1.4795

Economic Order Quantity = ((2 * Annual Demand * Ordering Cost)/ (Holding Cost * Price)

                                              = Sqrt ((2 * 540 * 50) / (0.2 * 400)) = 25.98 = 26

Safety Stock = z * Standard Deviation of daily demand

                        = 1.28 * 8 = 10.24

Reorder Point = (Daily Demand * Lead Time) + Safety Stock = (1.4795 * 13) + 10.24= 19.23 + 10.24 = 29.47 = 30

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