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What is the total cost of ordering and carrying inventory

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Reference no: EM133123337

Question - Creative Equipment, based in Waterloo, Ontario, manufactures virtual reality goggles and purchases one of the components used in the goggles from a supplier in Burnaby, B.C. The company uses 5,000 of these components per year at a cost of $80 each.

The components are used evenly in the production process throughout a 360-day production year. The company estimates that it costs $10 to place a single purchase order and about $40 to carry each component in inventory for a year. Delivery from the supplier generally takes two days, but it can take as many as six days. The days of delivery time and the percentage of their occurrence are shown in the following tabulation:

2days -> 75% of occurrence

3days -> 10% of occurrence

4days -> 5% of occurrence

5days -> 5% of occurrence

6days -> 5% of occurrence

a. Assume that the company is willing to assume a 10% risk of being out of stock. What is the safety stock? The reorder point?

b. Assume that the company is willing to assume only a 5% risk of being out of stock. What is the safety stock? The reorder point?

c. Assume a 5% stock-out risk as stated in (3) above. What is the total cost of ordering and carrying inventory for one year?

Reference no: EM133123337

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