Cranium, Inc., purchases term papers from an overseas supplier under a continuous review system. The average demand for a popular mode is 300 units a day with a standard deviation of 30 units a day. It costs $60 to process each order and there is a five−day lead−time. The holding cost for a paper is $0.25 per year and the company policy is to maintain a 98% service level. Cranium operates 200 days per year.

What is the reorder point R to satisfy a 98% cycleminus−servicelevel?

A. greater than 1,700 units

B. greater than 1,600 units but less than or equal to 1,700 units

C. greater than 1,500 units but less than or equal to 1,600 units

D. less than or equal to 1,500 units

In the following scenario:

Cranium, Inc., purchases term papers from an overseas supplier under a continuous review system. The average demand for a popular mode is 300 units a day with a standard deviation of 30 units a day. It costs $60 to process each order and there is a five−day lead−time. The holding cost for a paper is $0.25 per year and the company policy is to maintain a 98% service level. Cranium operates 200 days per year.

The reorder point R to satisfy a 98% cycleminus−servicelevel:

C. greater than 1,500 units but less than or equal to 1,600 units

Explanation:

The reorder point is the level of inventory that unleashes the action to refill the stock we have stored. In other words, is the minimum number of units a company has of the same item in storage, and when the stock falls to that number the trigger is actioned and the company needs to get the units of the item. The formula to obtain it is (Average daily usage x Average lead time in days ) + Stock. or (300 x 5) +  stock. The stock has to be minimal because the demand is high in those 5 days. So it has t be lower than 100 units.