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Muthothi Ltd. Operates a conventional stock control system based on re-order levels and Economic Order Quantities (EOQ). The various control levels were set originally based on estimates...

      

Muthothi Ltd. Operates a conventional stock control system based on re-order levels and
Economic Order Quantities (EOQ). The various control levels were set originally based on
estimates which did not allow for any uncertainty and this has caused difficulties because, in
practice, lead times, demands and other factors to vary.
fig735301.png
The company works for 360 days per year and it costs Sh.1,000 to place an order. The
holding cost is estimated at Sh.0.025 for storage plus 10% opportunity cost of capital. Each
unit is purchased at Sh.2. The re-order level for this part is currently 150,000 units and it can
be assumed that the demands would apply for the whole of the appropriate lead-time.
Required:
a) Calculate the level of buffer stock implicit in a re-order level of 150,000 units.
b) Calculate the probability of stock-outs.
c) Calculate the expected annual stock-outs in units.
d) Compute the stock-out costs per unit at which it would be worthwhile raising the reorder
level to 175,000 units.
e) Discuss the possible alternatives to a re-order level EOQ inventory system and their
advantages and disadvantages.

  

Answers


Kavungya
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Kavungya answered the question on May 3, 2021 at 12:02


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