Ordering cotton underwear for ace retail stores

Assignment Help Financial Management

Reference no: EM13940926

The purchasing agent responsible for ordering cotton underwear for Ace Retail Stores has come up with the following information:
Sol:
Maximum daily usage
100 packages
Average daily usage
80 packages
Lead time
9 days
Economic order quantity
3,500 packages

Compute the safety stock.
Calculate the reorder point.

Maximum daily usage
100 packages
Average daily usage
80
Excess
20
Lead time
X9 days
Safety stock
180 packages
2. Reorder point = Average usage during lead time + Safety stock
= 80 packages X 9 days + 180 packages = 720 + 180 = 900 packages

Harrington &Sons, Inc., would like to determine the safety stock to maintain for a product so that the lowest combination of stockout cost and carrying cost will result. Each stockout will cost $75; the carrying cost for each safety stock unit will be $1;the product will be ordered five times a year. The following probabilities of running out of stock during an order period are associated with various safety stock levels:

Safety Stock Level
Probability of Stock out
10 units
40%
20
20
40
10
80
5
Using the expected value approach, determine the safety stock level.

Reference no: EM13940926

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