B&L; Hardware manufactures high-end front door hardware that is sold through a v

Question

B&L; Hardware manufactures high-end front door hardware that is sold through a variety of retail outlets. The most popular model sells (wholesale) for $300 each and costs $250 to make. Past data show that average monthly demand is 1500 with a standard deviation of 150 and that the Normal distribution is a reasonable fit. B&L; Hardware uses a 20% annual interest charge to estimate inventory carrying costs. If all orders are backlogged and the cost of lost customer goodwill is $20, what reorder level, r, should B&L; Hardware use? If any order not filled from stock is lost, what reorder level r, should B&L; Hardware use?

Explanation / Answer

Answer: Here the cost of an article is $250

and the interest rate is 20%

therefore holding cost = 20% x $250 = $50

Now here the criticle fractile = $20 / $20+$50 = 2/7 = 0.285

here $20 is bacorder cost and $50 is holding cost

Therefore Z value = -0.568

therefore Re order level = demand + Z value x std dev = 1500 + -0.568 x 150 = 1414.8

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