A Product Has a Reorder Point of 260 Units, and Is

question 115

Essay

A product has a reorder point of 260 units, and is ordered ten times a year. The following table shows the historical distribution of demand values observed during the reorder period.
$$\begin{array} { | c | c | } \hline \text { Demand } & \text { Probability } \\\hline 240 & .1 \\\hline 250 & .2 \\\hline 260 & .4 \\\hline 270 & .2 \\\hline 280 & .1 \\\hline\end{array}$$
Currently, stockouts are valued at $5 per unit per occurrence, while inventory carrying costs are $2 per unit per year. Should the firm add safety stock?
If so, how much safety stock should be added?

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Definitions:

CAPM

Short for Capital Asset Pricing Model, a financial model that describes the relationship between systematic risk and expected return for assets.

Required Rates of Return

The minimum annual percentage earnings needed from an investment to compensate for its risk, serving as a benchmark for evaluating potential investments.

Standard Deviations

A statistical measure of the dispersion or variability of a set of data points or investment returns from their average value.

Expected Return

The weighted average of the probable returns of an investment, calculated based on past performance or statistical analyses.