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Inventory problem: Decision regarding policy

The A&M Hobby Shop carries a line of radio controlled model racing cars. Demand for the cars is assumed to be constant at rate of 40 cars per month. The cars cost $60 each, and ordering costs are approximately $15 per order, regardless of the order size. The annual holding cost rate is 20%.

a. Determine the economic order quantity, and total annual cost, under the assumption that no backorders are permitted.
b. Using a $45 per-unit-year backorder cost, determine the minimum cost inventory policy, and total annual cost for the model racing cars.
c. What is the maximum number of days a customer would have to wait for a backorder under the policy in part b. above? (Assume that the Hobby Shop is open for business 300 days per year.)
d.Would you recommend a no-backorder, or a backorder, inventory policy for this product. Explain
e. If the lead time is six days what is the reorder point for both the no-backorder, and backorder, inventory policies?

Solution Summary

This posting contains solution to following inventory policy problem.