Monthly demand (D) ~ N(μD=540, σD=56)
P = review period = 24 days = 24/30 = 0.80 month
L = avergae lead time of delivery = 18 days = 0.60 month
CSL = 93%, so, Z = NORMSINV(0.93) = 1.48 where Z ~ N(0,1)
H = annual holding cost per part = $35 x 20% = $7
(a)
Safety stock (SS) = Z.σD.SQRT(P+L) = 1.48*56*SQRT(0.8+0.6) ≅ 98 (rounded off to nearest integer)
(b)
Target inventory level = μD.(P+L) + SS = 540*(0.8+0.6) + 98 = 854
Q = average order quantity = μD.P = 540*0.8 = 432
Average inventory on order = T – Q = 854 – 432 = 422
(c)
Annual holding cost for the safety stock = SS x H = 98 x $7 = $686