Answer (A) is correct . The cost of safety stock is given as carrying cost plus expected stockout cost. At 20% of the $50 unit inventory cost, carrying cost is $10 per unit per year. Thus, carrying cost for 100?units of safety stock is $1,000. A stockout has a 15% probability at this level of safety stock, and stockout costs are $500 (100 ¡Á $5) for each occurrence. If the firm orders 10 times per year, the expected number of stockouts is 1.5 (15%?¡Á 10). Hence, total expected stockout cost for the year is $750 ($500 ¡Á 1.5). Total cost is $1,750 per year ($1,000 + $750).< Answer (B) is incorrect because The amount of $1,950 is the sum of the expected stockout costs for stockouts of 100 units and 200?units. Answer (C) is incorrect because The carrying cost alone is $10?per unit, or $1,000 per year. Answer (D) is incorrect because The amount of $2,000 is the carrying cost of 200 units of safety stock.
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