A distributor of large appliances needs to determine the order quantities and reorder points for the various products it carries. The following data refer to a specific refrigerator in its product line:
Cost to place an order - $100
Holding cost - 20% of product cost per year
Cost of refrigerator - $500 each
Annual demand - 500 refrigerators
Standard deviation during lead time - 10 refrigerators
Lead time - 7 days
Consider an even daily demand and a 365-day year.
a. What is the economic order quantity?
b. If the distributor wants a 97 percent service probability, what reorder point, R, should be used?