you use different approaches to choose the order quantity for a new Flu medication. The medication has a retail price of $50 with a salvage value of $1. Also, it costs you $20 to supply one unit of this medication. The forecasted demand is supposed to be normally distributed with a mean of 5,000 and a standard deviation of 500 units.

(a) Compute the order quantity, Q, to achieve a 98 percent fill rate (service level):

(b) How many units of medication, Q, should be ordered to achieve a 96 percent in-stock probability?

(c) What is the critical ratio given the above information?

(d) What is the expected profit maximizing order quantity given the above information?

(e) Now assume that you have historical sales data on recent similar medications sales. So, you can build an empirical distribution instead of the assumption that the actual demand is normally distributed. In the below table, the actual demand, forecasted demand, and A/F ratio are summarized for 16 similar medications. Use the data to find the optimal order quantity, Q (Hint: Assume the forecast remains at 5,000 units).

Book Actual Demand Forecast A/F Ratio 1 2,600 10,000 0.26 2 22,320 18,000 1.24 3 4,240 8,000 0.53 4 4,810 6,500 0.74 5 13,650 13,000 1.05 6 5,445 4,500 1.21 7 440 2,000 0.22 5,075 3,500 1.45 Book Actual Demand Forecast A/F Ratio 9 5,220 6,000 0.87 10 4,565 5,500 0.83 11 2,720 2,000 1.36 12 9,375 7,500 1.25 13 1,475 2,500 0.59 14 7,020 9,000 0.78 15 4,900 5,000 0.98 16 13,020 14,000 0.93 8