Retailers Warehouse (RW) is an independent supplier of household items to department stores. RW attempts to stock enough items for a 98 percent service probability. A stainless steel knife set is one item it stocks. Demand (2,400 sets per year) is relatively stable over the entire year. Whenever new stock is ordered, a buyer must assure that numbers are correct for stock on hand and then phone in a new order. The total cost involved to place an order is about $ 5. RW Figures that holding inventory in stock and paying for interest on borrowed capital, insurance, and so on, add up to about $ 4 holding cost per unit per year. Analysis of the past data shows that the standard deviation of demand from retailers is about four units per day for a 365- day year. Lead time to get the order is seven days.
a. What is the economic order quantity?
b. What is the reorder point?