# 1. Jake, Inc. begins a review of ordering policies for its continuous review system by checking the current policies for a sample of its A items. Following are the characteristics of one item: Demand (D) = 94 units/week (assume 52 weeks per year) Ordering and setup cost (S) = \$720/order Holding cost (H) = \$23/unit/year Lead time (L) = 3 weeks Standard deviation of weekly demand = 30 units Cycle-service level = 82 percent a. What is the EOQ for this item? b. What is the desired safety stock? c. What is the reorder point? d. What are the cost implications if the current policy for this item is Q = 300 and ROP = 120?

Weekly demand (d) = 94 units

Annual demand (D) = d x number of weeks per year = 94 x 52 = 48888 units

Ordering cost (S) = \$720 per order

Holding cost (H) = \$23

Lead time (L) = 3 weeks

Standard deviation of weekly demand (sigmad) = 30 units

At 82% service level value of Z = 0.92

a) EOQ = Sqrt of (2DS / H)

= sqrt of [(2 x 4888 x 720) / 23)]

= 553.20 units

b) Safety stock = Z x sigma d x sqrt of L

= 0.92 x 30 x sqrt of 3

= 0.92 x 30 x 1.73

= 47.75 units

C) Reorder point = d x L + Safety stock

= 94 x 3 + 47.75

= 282 + 47.75

= 329.75 units

d) If the order quantity (Q) = 300 units

Annual Ordering cost = (D/Q) S = (4888/300)720 = \$11731.2

Annual holding cost = (Q/2)H = (300/2)23 = \$3450

Total annual cost = Ordering cost + Holding cost

= \$11731.2 + \$3450

= \$15181.2

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