(Solved Homework): 1. Foster Drugs, Inc., handles a variety of health and beauty products. A particular…

1. Foster Drugs, Inc., handles a variety of health and beauty products. A particular hair conditioner costs Foster Drugs $2.95 per unit. The annual holding cost rate is 20% of the value of the hair conditioner. Every week, Foster Drugs experiences demand for 150 units of this hair conditioner. a. Assume that Foster Drugs incurs a cost of $4.25 every time they place an order. In addition, we know that Foster Drugs currently uses a continuous review model to manage inventory. How many units should they be purchasing per order if they are trying to minimize cost? (round your answer to the nearest whole number) b. What is the total variable cost (i.e. costs that vary based on the order quantity) of this policy (i.e., do not account for procurement cost)? c. Now assume that Foster Drugs’ supplier has lead time of 1 week in getting a shipment processed and delivered and the weekly demand described above is normally distributed with an average of 150 units and a standard deviation of 40 units. What is the firm’s reorder point if they are willing to tolerate a stockout of 1% in any one cycle? d. Assuming that the safety stock found in part c. is kept as a constant buffer throughout the course of the year, how much does this increase Foster Drugs holding cost by (compared to a model when demand is deterministic)? Foster Drugs is now considering a periodic review model in an attempt to coordinate ordering for its many products. They are proposing a 2 week review period. Demand during the two week review period plus the one week lead time is normally distributed with a mean of 450 (3 weeks x 150/week) and a standard deviation of 70. e. If the firm would still like to have a 1% stockout rate, what would you recommend as their replenishment level? f. Under this policy, what would Foster Drugs be paying in terms of annual holding cost for ONLY the safety stock they plan to keep? g. In comparing your assessment of both policies (e.g., accounting for lead time, safety stock costs, etc.), which policy would you recommend and why? h. What if this product were worth $295 instead of $2.95, would you favor continuous or periodic review for this more expensive item?

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