Sam's Cat Hotel operates 52 weeks per year,6 days per week and uses a continuous review inventory system. It purchases kitty litter for $11.70 per bag. The following information is available about these bags.
Order COst= $54/order
Annual holding cost= 27% of cost
desired cycle-service level = 80%
lead time=3 weeks (18 working days)
standard deviation of weekly demand = 15 bags
current on hand inventory is 320 bags, with no open orders or backorders.
a) Suppose that the weekly demand forecast of 90 bags is incorrect and the actual demand averages only 60 bags per week. How much higher will total cost be, owing to the distorted EOQ caused by this forecast error?
b) Suppose the actual demand is 60 bags but that ordering cost are cut to only $6 by using the internet to automate order placing. However the buyer does not tell anyone, and the EOQ is not adjusted to reflect this reduction in S. How much higher will total costs be, compared to what they could be if EOQ were adjusted?
This posting contains solution to following problem on continuous review inventory system.