Consider an item under (s, Q) control. Basic item information is as follows: D =

40,000 units/year; A = $20; r = 0.25 $/$/year; and v = $1.60/unit. All demand when out of stock is backordered. The EOQ is used to establish the Q value. A service level of 0.95

(demand satisfied without backorder) is desired. The item’s demand is somewhat difficult to predict and two forecasting procedures are possible.

Cost to Operate per Year σL System ($/Year) (Units)

A (complex) 200 1,000 B (simple) 35 2,300 Which forecasting system should be used? Discuss. Note: Forecast errors can be assumed to be normally distributed with zero bias for both models.