Problem
Moo-IQ distributes boxes of canned calf brains. Moo-IQ receives monthly deliveries from its supplier, who replenishes the boxes up to a level that Moo-IQ is free to specify. Moo-IQ buys the boxes at $450 each and sells them for $600 each to its wholesaler customers. The annual inventory carrying charge is 20%. Monthly demand of boxes is normally distributed with mean 3,500 and standard deviation 400. Moo-IQ's management wants to limit the probability of a stock-out on any given month to 9%.
1. What value of a replenishment level would you recommend?
2. What is Moo-IQ's annual cost of holding safety stock?
3. What is Moo-IQ's average level of cycle stock?