Question

Joanne's Garden Products always seems to be out of 20-20-20 fertilizer. This results in angry customers and unhealthy herbage. Joanne knows that the economic order quantity for this fertilizer is 100 units, that the carrying cost is $4.25 per package, and that the stockout cost is $2.00 per package. Total annual demand for the product is 2,500 packages. Joanne has hired a marketing firm to evaluate the probabilities relating to demand for the fertilizer. They produced the following table relating to the stockout problem:

            Number of packages needed to meet                                      Probability

            demand during the reorder period

                                                0                                                                     .83

                                                20                                                                    .15

                                                30                                                                    .02

REQUIRED:

Calculate the number of units of safety stock Joanne should keep on hand to meet excess demand for the fertilizer during the reorder period.

Answer 1