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ZZZ is a specialty store that sells imported ethnic grocery items. We will consider only one product here, molasses in 10 oz. packing. The annual demand for the product is 6000 units. The store operates for 300 days of the year; the standard deviation of daily demand is 5 units of the product. Each unit of 10 oz. pack sells for $8; the holding cost is 25% of selling price. The vendor charges a flat fee of $15 per shipment; and order preparation for placing a shipment order takes 15 minutes of managerial time; the manager is paid $50 per hour.
(i) Using a continuous review model, what is the optimal quantity to order (EOQ). (10)
(ii) How many orders are placed annually? What is the annual ordering cost? (5)
(iii) Calculate the average inventory and the annual holding cost. (5)
(iv) How do the annual holding cost compare with the annual ordering cost? (5)
(v) Assume that the lead time is 3 days. What would be the ROP WITHOUT safety stock. (5)
(vi) If ZZZ should have a service rate of 98%, what would be the ROP and the associated safety stock. What is the additional holding cost on account of the safety stock.
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