Annual demand for number two pencils at the campus store is basically distributed with mean 1,000 and standard deviation of 250. The store buys the pencils for 6 cents each and sells them for 20 cents each. There is two-month lead time from the initiation to the receipt of order. The store accountant estimates that the cost in employee time for performing the essential paperwork to initiate and receive the order is $20, and suggests a 22% annual interest rate for determining holding cost. The cost of stock out is the cost of lost profit plus an additional 20 cents per pencil, which characterizes the cost of loss of the goodwill.

Required:

1. Find out the optimal values of Q and R.

2. Substitute the Type 1 service level criterion of 95% for stock-out cost. Find out the values of Q and R.

3. Substitute the Type 2 service level criterion of 98% for stock-out cost. Suppose that Q is given by the EOQ. Find out the values of Q and R.