Furnco sells secretarial chairs. Annual demand is normally distributed, with mean of 1,040 chairs and standard deviation of 50.99 chairs. Furnco orders its chairs from its flagship store. It costs $100 to place an order, and the lead time is two weeks. Furnco estimates that each stock out causes a loss of $50 in future goodwill. Furnco pays $60 for each chair and sells it for $100. The annual cost of holding a chair in inventory is 30% of its purchase cost. a Assuming that all demand is backlogged, what are the reorder point and the safety stock level?
b Assuming that all stockouts result in lost sales, determine the optimal reorder point and the safety stock level.

Reorder point is 40

Explanation:

Reorder point is the level of inventory which trigger the purchase of new inventory.

The formula for Reorder point is

Annual demand * Leadtime + Safety Stock

Reorder Point = 1040 / 365 * 14 days + 0

= 40.

The lost sales cost is $50 in goodwill, Furnco should keep a safety stock of at least 30 chairs in order to meet demand level.

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