Annual inventory carrying cost of the safety stock

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Reference no: EM132220181

Inventory management problem:

1. Freeport Corporation finds that demand for surfboards has average demand of 10 units per day, with a standard deviation of 3 units. Lead time from the supplier averages 12 days, with a standard deviation of 2 days. The item costs $50 and the inventory carrying cost is 30%.

a. Suppose management decides to offer a 95% service level. That is, it is willing to experience a stockout probability of 5% during the order cycle. How much safety stock should be carried?

b. How much is the annual inventory carrying cost of the safety stock because of this decision?

c. You decide that you want this company to give better service to its customers. You decide that a 99% service level is appropriate. How much safety stock must be carried to offer this service level?

d. What is the additional inventory carrying cost that will be incurred on this item because of your decision to increase the service level?

Please show the math in details for each of the question.

Reference no: EM132220181

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