Kelly's Service Station Does a Large Business in Tune-Ups

question 36

Essay

Kelly's Service Station does a large business in tune-ups.Demand has been averaging 210 spark plugs per week.Holding costs are $0.01 per plug per week,and reorder costs are estimated at $10 per order.Kelly does not want to be out of stock on more than 1% of his orders.There is a one-day delivery time.The standard deviation of demand is five plugs per day.Assume a normal distribution of demand during lead time and a seven-day work week.
a.What inventory policy do you suggest for Kelly's station?
b.What is the average amount of safety stock for the reorder point in part (a)?
c.What is the total variable weekly cost including safety stock cost?

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Definitions:

Direct Labor-Hours

The total number of hours worked by employees directly involved in the manufacturing process.

Manufacturing Departments

Specific areas within a manufacturing facility where distinct stages of production are carried out.

Predetermined Overhead Rates

Rates used to allocate overhead costs to products or job orders, based on estimated costs and activity levels.

Direct Labor-Hours

The sum of hours contributed by workers directly participating in the creation of a product or the execution of a service.