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A Music warehouse keeps stocks of variety of musical instrument parts that are sold in...

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Accounting

A Music warehouse keeps stocks of variety of musical instrument parts that are sold in nearby retail stores. One particular part a capacitor used in electric guitars is stocked regularly and is purchased at $2 each. Accounting estimates the cost of placing new orders around $120 per order. The inventory holding cost is based on a 20% annual interest rate. The monthly demand for the capacitor follows a normal distribution with a mean of 250 units and a standard deviation of 60 units. The order lead time is about 4 months since the capacitors are built overseas. If a stock out occurs the demand is backordered and cost of back-ordering (or cost of stock out) is estimated roughly as $10 per unit.

a) Service level based approach: Assuming that the company wants to use EOQ and achieve a 98% service level in meeting demand, what would be the order quantity and the reorder point?

b) What is the average costs related to holding, setup (ordering), and stock outs for this inventory control policy.

c) What is the cost associated with uncertainty for this inventory control process? (Hint: identify costs without uncertainties and compare)

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