SECTION A PROBLEM SOLVING : PET EMPIRE Sdn. Bhd. (40 Marks) Pet Empire operates 52 weeks per year, 6 days per week, and uses a continuous review inventory system. It purchases kitty litter for $11.70 per bag. The following information is available about these bags. Demand is 90 bags per week, order cost is $54 per order, annual holding cost is 27% of the cost, service level is 80%, lead time is 3 weeks (18 working days), and standard deviation of weekly demand is 15 bags. Current on hand inventory is 320 bags with no open orders or back orders. Require to calculate Economic Order Quantity (EOQ). What would be the average time between orders (in weeks)? Calculate reorder point (R). The store currently uses a lot size of 500 bags (i.e., Q = 500). Calculate the annual holding cost of this policy and also annual ordering cost. Without calculating the EOQ, how can you conclude from these two calculation that the current lot size is too large? What would be the annual cost saved by shifting from the 500-bag lot size to the EOQ? Consider again the kitty litter ordering policy for Pet Empire, suppose that weekly demand forecast of 90 bags is incorrect and actual demand averages only 60 bags per week. How much higher will total costs be, owing to distorted EOQ caused by this forecast error? Suppose again that actual demand is 60 bags but that ordering costs are cut to only $6 by using the internet to automate order placing. However, the buyer does not tell anyone, and the EOQ is not adjusted to reflect this reduction in ordering costs. How much higher will total costs be, compared to what they could be if the EOQ were adjusted? Suppose that Pet Empire uses a P system instead of a Q system. The average daily demand is d = 90/6 = 15 bags and the standard deviation of daily demand is (15/16) = 6.124 bags and at zero amount of inventory on hand. Calculate average time between orders, new safety stock quantity and also order quantity with variable demands should be used to approximate the cost trade-offs of the EOQ. How much more safety stock is need than with a Q system