What should the inventory target be

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Reference no: EM132199820

Question - A manufacturer produces mobile phone battery chargers that are sold at electronics stores. A popular model is sold to the stores by the manufacturer for $15, and it costs the manufacturer $10 to produce Based on the history of sales for this charger, the average monthly demand is 500 units, with a standard deviation of 100 units. A normal distribution is a good fit for the randomness in charger demand. The annual carrying cost of inventory is 30% of the cost of the units in stock.

i. Assume that the manufacturer produces the chargers once per month. If all orders from electronic stores are backlogged when there is a shortage of inventory at the manufacturer, and cost of the lost goodwill due to backorder delays is $2 per unit, what should the inventory target be?

ii. Assume that the manufacturer produces the chargers once per month. If any order not filled from stock is lost (i.e. the customer goes to a competing manufacturer), what should the inventory target be?

iii. Explain the difference in your answer between parts i and ii.

Reference no: EM132199820

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