Homework Answers
Answer:
Cost of overstocking, Co = 182-52 = $130
Cost of understocking, Cu = 670*2 = $1340
Critical Ratio = Cu/(Cu+Co) = 1340/(1340+130) = 0.91
Cumulative Probability of usage table
| Usage | Probability | Cumulative probability |
| 0 | 0.05 | 0.05 |
| 1 | 0.40 | 0.45 |
| 2 | 0.20 | 0.65 |
| 3 | 0.35 | 1.00 |
Critical ratio 0.91 is more than cumulative probability of 0.65 and less than 1. Therefore optimal stocking level is 3.
a) Service level is 0.91(or 91%), so we need to order 3 spares.
b) Using tabular method
Total cost for given demand and stocking level is calculated by the following formula.
Total Cost = MAX(D,S)*182+MAX(O,D-S)*1340-MAX(O,S-D)*52
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