A Company Has Average Demand of 30 Units Per Day

question 39

Multiple Choice

A company has average demand of 30 units per day. Lead time from the supplier averages 7 days. Assume that the combined standard deviation of demand during lead time has been calculated and is equal to 20 units. One unit costs $10 and the inventory carrying cost is 25 percent. Suppose management decides it wants to offer a 95 percent service level. That is, it is willing to experience a stockout probability of 5 percent during the order cycle. What is the annual cost of this safety stock policy?

• A)$82.50
• B)$87.50
• C)$115.00
• D)$62.50

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Definitions:

Fixed Input

A production factor that remains unchanged regardless of the level of output in the short run.

Marginal Product

The additional output generated by employing one more unit of a particular input, keeping other inputs constant.

Units of Labor

Measurements used to quantify the work input by labor forces, often referring to hours worked or number of workers.

Diminishing Returns

A principle stating that if one input in the production of a commodity is increased while all other inputs are held fixed, a point will eventually be reached at which additions of the input yield progressively smaller, or diminishing, increases in output.