Sunnyvale Inc. would like to determine the safety stock it needs to maintain for a product, to incur the lowest combination of stock out cost and carrying cost. Each stock out costs $75; the carrying cost for each safety stock unit is $1; the product is ordered five times a year. The following probabilities of running out of stock during an order period are associated with various safety stock levels.
Safety Stock Level Probability of Stock out
10 units ..................................... 40 %
20 ........................................... 20
40 ........................................... 8
80 .......................................... 4
Required:
Determine the combined stock out and safety stock carrying cost associated with each level and the recommended level of safety stock.