Daily Demand for Packages of Five Videotapes at a Warehouse

question 48

Essay

Daily demand for packages of five videotapes at a warehouse store is found to be normally distributed with mean 50 and standard deviation 5. When the store orders more tapes, the ordering cost is $42 and the orders take 4 days to arrive. Each pack of tapes costs $7.20 and there is a 24% annual holding cost for inventory. Assume the store is open 360 days a year.
a.What is the EOQ?
b.If the store wants the probability of stocking out to be no more than 5%, and demand each day is independent of the day before, what reorder point should be set?
c.How much of your reorder point in part b) is safety stock?

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Definitions:

Troy Oz

A unit of measure for precious metals, equivalent to approximately 31.1035 grams, used in the commodities market.

July Silver Contract

A futures contract for the delivery of a specified amount of silver in the month of July.

Marking-To-Market

The accounting practice of updating the value of an asset to its current market level rather than its book value, typically used for financial instruments.