Talbot industries is evaluating its service level policy

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Reference no: EM132294896

Talbot Industries is evaluating its service level policy for a product that is considered critical to customers.

Demand for the item averages 100 units per day and the lead time from the supplier of the item averages 10 days. An analysis of demand and lead time patterns has shown that the standard deviation of demand during lead time is 110 units. The existing service level policy allows for a stockout probability of 10 percent during the replenishment cycle. Marketing managers claim that the item is so critical that the firm should carry three standard deviations of safety stock.

If the item cost is $50 and Talbot’s inventory carrying cost is 25 percent, what is the incremental inventory carrying cost of the suggestion by marketing managers?

Note: Incremental carrying cost is the additional cost incurred by changing to 3 standard deviations.

Reference no: EM132294896

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