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pduvin pduvin
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6 years ago
The annual demand for a company's product is 3,750 units, and monthly demand varies from 200 to 400 units with the following probability of demand:

200 units have a 25 percent probability
300 units have a 50 percent probability
400 units have a 25 percent probability

The EOQ model provides an optimal order quantity of 250 units. The opportunity costs of being out of stock are $2 per unit, with a carrying cost of $13 per unit, and the reorder point is 250 units.

Required:
a.   Prepare a table showing stockouts, expected stockout costs, related carrying costs, and total costs, at each level of demand if the selected safety stocks are: 0, 50, 100 and 150.
b.   What is the best level of safety stock to carry?
Textbook 
Cost Accounting: A Managerial Emphasis, Canadian Edition

Cost Accounting: A Managerial Emphasis, Canadian Edition


Edition: 7th
Authors:
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wrote...
#1
6 years ago
a.
   Relevant   Expected    Relevant
Safety      Stockouts      Stockout   Stockout   Carrying   Total
Stock   Demand   in Units    Prob    Costs   Orders   Costs   Costs   Costs
   0         0.25   
      300   50   0.50   $100   15   $750
      400   150   0.25   300   15   $1,125
                           $1,875
   50         0.25
            0.50
      400   100   0.25   $200   15   $750   $650   $1,400

   100         0.25
            0.50
      400   50   0.25   $100   15   $375   $1,300   $1,675

   150         0.25
            0.50
            0.25      15   $1,950      $1,950

b.   The safety stock of 50 units is the best with the lowest total cost.
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