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:

Income Statements

A financial statement that shows a company's revenues and expenses over a specific period, leading to the net income or loss.

Merchandising Company

A business that purchases goods and sells them at a higher price without changing their form.

Manufacturing Company

A type of business that produces finished goods from raw materials through the use of labor and machinery.

Cost of Goods Sold

Cost of Goods Sold (COGS) represents the direct costs attributable to the production of the goods sold by a company, including the cost of materials and labor used to create the product.