The annual demand for a certain item is N(600,52). Suppose the annual stock level is 600. If demand is less than 600, the annual holding cost of the leftover items is $165 per item. If the demand is greater than $600, then the loss of good will is $300 per item. a. Determine the expected annual cost of shortages or surpluses of this product. b. Compute the standard deviation of costs. c. Comment on the stock level of 600. Can you determine the appropriate stock level that minimizes expected cost.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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The annual demand for a certain item is N(600,52). Suppose the annual stock
level is 600. If demand is less than 600, the annual holding cost of the
leftover items is $165 per item. If the demand is greater than $600, then the
loss of good will is $300 per item.
a. Determine the expected annual cost of shortages or surpluses of this
product.
b. Compute the standard deviation of costs.
c. Comment on the stock level of 600. Can you determine the appropriate
stock level that minimizes expected cost.
Transcribed Image Text:The annual demand for a certain item is N(600,52). Suppose the annual stock level is 600. If demand is less than 600, the annual holding cost of the leftover items is $165 per item. If the demand is greater than $600, then the loss of good will is $300 per item. a. Determine the expected annual cost of shortages or surpluses of this product. b. Compute the standard deviation of costs. c. Comment on the stock level of 600. Can you determine the appropriate stock level that minimizes expected cost.
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