Question

The Dolly Llama Farm keeps an average of 50 of those funny creatures on hand and each consumes a pound of grain a day, 365 days per year. Grain costs $12 for a 50 pound bag and it costs the farm $10 to make a run to the feed store to pick up an order, regardless of order size. It takes the feed store four days to acquire, mix, and bag the special blend of grains necessary to make the feed the Dolly Llama Farm prefers. Storage costs for the feed runs 15% of the unit cost as the cost of money, loss due to critters, and spoilage all add up. The actual usage for grain depends on which llamas show up at feeding time, thus there is an average need for 50 pounds of grain each day with a standard deviation of five pounds. The farm is willing to tolerate a 5% chance of running out of feed before they can get some more hauled in. The llamas would prefer a 0% chance, but they don't get a vote. What reorder point achieves the farm's objectives using continuous review system?

Answer 1

Answer:

The right approach is "282 pounds".

Explanation:

The given values are:

Average consumption (d)

= 50 pounds a day

Lead time (L)

= 4 days

Standard deviation of lead time (sl)

= 1 day

Z value for 5% stock out risk  will be:

⇒  $NORMSINV(1-5 \ percent)$

⇒  $1.645$

So,

Reorder point is:

⇒  $d\times L + z\times d\times sl$

On substituting the values, we get

⇒  $50\times 4 + 1.645\times 50\times 1$

⇒  $282 \ pounds$