A product with an annual demand of 1000 units has C0 = $25.50 and Cc = $8. The demand exhibits some variability such that the lead-time demand follows a normal probability distribution with μ = 25 and σ = 5.
a) What is the recommended order quantity?
b) What are the reorder point and safety stock if the firm desires at most a 2% probability of stock-out on any given cycle?
c) If the manager sets the reorder point at 30, what is the probability of a stock-out on any given cycle? How many times would you expect a stock-out during the year if this reorder point were used?