A product with an annual demand of 1000 units has Co = $25.50 and Ch = $8. The demand exhibits some variability such that the lead-time demand follows a normal probability distribution with μ = 25 and σ = 5. 1. What is the recommended order quantity? 2. What are the reorder point and safety stock if the firm desires at most a 2% probability of stock-out on any given order cycle? 3. If a manager sets the reorder point at 30, what is the probability of a stock-out on any given order cycle? How many times would you expect a stock-out during the year if this reorder point were used?
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