David Rivera Optical has determined that its reorder point for eyeglass frames is 50 (d x LT) units. Its carrying cost per frame per year is $5, and stockout (or lost sale) cost is $40 per frame. The store has experienced the following probability distribution for inventory demand during the reorder period. The optimum number of orders per year is six.How much safety stock should David Rivera keep on hand?
| Units | Prob. |
| 30 | 0.2 |
| 40 | 0.2 |
| 50 (ROP) | 0.3 |
| 60 | 0.2 |
| 70 | 0.1 |
Reorder point = 50
Total cost = Incremental Holding cost ( Safety stock * 5) + Stockout cost ( Expected stockouts * probability of stockout * Cost of stockout * Number of orders / year0
Total cost when ROP = 50, SS = 0
= 0 * 5 + (60-50)*0.2*40*6 + (70-50)*0.1*40*6= $960
Total cost when ROP = 60, SS = 10
= 10 * 5 + (70-60)*0.1*40*6= $290
Total cost when ROP = 70, SS = 20
= 20 * 5 + 0 = $100
Hence, 70 frames is the optimal order with a safety stock of 20.
David Rivera Optical has determined that its reorder point for eyeglass frames is 50 (d x...
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