# Textbook Answer

**Topics:**Inventory, Supply chain management, Economic order quantity

**Pages:**4 (1350 words)

**Published:**September 10, 2012

Inventory Review

Question

[1] Toys R'Fun is planning a new line of cuddly toys called “furby.” The plush furby toy will be priced at $27. Toys R'Fun purchases the fur by for $18. The annual demand is estimated to be 36,400 furbys (or 700 per week). The opportunity cost of capital for Toy R'Fun is 25% per annum. Other relevant holding costs (taxes, insurance, theft, obsolescence, etc.) are estimated to be 8% per annum. The cost of capital is 10% per annum. The ordering cost is $40 per order. It is also estimated that the weekly demand will have a normal distribution with a mean of 700 and standard deviation of 100. The lead-time to procure the toys from Hyderabad, India is guaranteed to be exactly 9 weeks if the shipment is by sea with a unit transportation cost of 5 cents. a) Find the economic order quantity (EOQ) and compute the total cost per year including the purchase cost @$18/furby but not inclusive of the transportation cost. b) Determine the safety stock for obtaining 99% service level (i.e., an in-stock probability of 99%). When should Toys R'Fun reorder? c) It has been suggested that Toys R'Fun use air shipment to ship the toys. Shipping by air reduces the transportation lead -time to 1 week but increases the unit transportation cost by 5 cents. Is it worthwhile to use air-shipments? [2] A mail order firm has four regional warehouses. Demand at each warehouse is normally distributed with a mean of 10,000 per week and a standard deviation of 2,000. Annual holding cost for the company is 25% and each unit costs $10. Each order incurs a fixed order cost of $1,000 (primarily from fixed transportation costs) and the lead time of supply is one week. The company wants the probability of stocking out to be no more than 5%. Each warehouse has an information system that allows it monitor inventory continuously. Assume that 50 weeks in a year. (a) Assuming that each warehouse operates independently what should be the order policy at...

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