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PROBLEM 1
Litely Corporation sells 1,350 of its special decorator light switch per year, and places orders for 300 of these switches at a time.
Assuming no safety stocks, Litely estimates a 50% chance of no shortages in each cycle, and the probability of shortages of 5, 10, and 15 units as 0.2, 0.15, and 0.15 respectively.
The carrying cost per unit per year is calculated as $5 and the stock-out cost is estimated at $6 ($3 lost profit per switch and another $3 lost in goodwill, or future sales loss).
1. What level of safety stock should Litely use for this product? (Consider safety stock of 0, 5, 10, and 15 units)
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