Question #2 One of Arthur Alpaca\'s best-selling products is an imported sausage
ID: 345391 • Letter: Q
Question
Question #2 One of Arthur Alpaca's best-selling products is an imported sausage that has lots of garlic in it. Annual demand is 2400kg. Holding costs of sausage are quite high at $1.18/kg per year. Every time Arthur places an order it costs him $10.37 regardless of the size of the order. 14] a. b. c. What is the economic order quantity of sausage assuming constant demand? If Arthur orders the quantity calculated in (a), how many orders does he place each year? 13] Demand is not constant. The lead time demand can be assumed to be a normal distribution with a standard deviation of 8.37kg. What is safety stock if management specify that the maximum probability of a stockout in a cycle is 10%?Explanation / Answer
Economic order quantity ( EOQ) is that order quantity which minimizes total inventory costs. Two inventory costs are inventory holding cost ( also called carrying costs)and inventory ordering costs, so at EOQ, these costs are minimum.
a) EOQ = SQRT (2 X demand x cost per order)/ carrying cost per unit
= SQRT ( 2 X 2400 X 10.37 )/ 1.18 = 206 KG
b) Orders placed in an year = Anuual demand / Economic oder quantity
= 2400/206 = 11.6 ~ 12 orders per year
c) Safety stock is a kind of buffer stock to be maintained to mitigate risk or stock out due to variation in demand .
here 10 % stock out means that 90% service level is desired which has a Z score of 1.28
safety stock = Z X std dev of demand during lead time = 1.28 X 8.37 = 10.7 KG