JC Manufacturing (JCM) has a policy for its raw materials tokeep 1 week’s (or ¼ month’s) supply as safety stock for every itemit carries. For one item, it uses an average of 200 units permonth. The item has a value of $24, ordering costs are $175, andholding costs are $6/item/year. The item is ordered in batches of200, the lead time is 0.5 months and the standard deviation of leadtime demand is 25 units.
a) How many shortages are expected per year? (5 points)
b) If the cost of a stockout is $200, what is the expected costof this policy (holding, ordering and shortage)? (10 points total;1 for setup, 3 each for holding, ordering and shortage)
