A small copy center uses 4 450-sheet boxes of copy paper a week. Experience sugg

Question

A small copy center uses 4 450-sheet boxes of copy paper a week. Experience suggests that usage can be well approximated by a normal distribution with a mean of 4 boxes per week and a standard deviation of .60 boxes per week. 3 weeks are required to fill an order for letterhead stationery. Ordering cost is $6, and annual holding cost is 33 cents per box

a. Determine the economic order quantity, assuming a 52-week year

b. If the copy center reorders when the supply on hand is 13 boxes, compute the risk of a stockou

Explanation / Answer

Holding cost, H = 0.33 dollar per box

Order cost, S = $6

D = 4*52 = 208 boxes / year

EOQ = Sqrt (2DS/H) = Sqrt (2*208*6 / 0..33) = sqrt (7563) = 87 boxes

b) Re-order point = Demand * Lead time = 4 *3 = 12 weeks, Standard deviation = 0.60

Z-statistic = (13-12) / 0.60 = 1.667

Stockout probability = 1 - Pr (Z <1.667) = 1 - 0.9515 = 0.0485 = 4.85%

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