Foods Galore is a major distributor to restaurants and other institutional food users.
a) Foods Galore buys cereal from a manufacturer for $21.40 per case. Annual demand for cereal is 235,000 cases, and the company believes that the demand is constant at 940 cases per day for each of the 250 days per year that it is open for business. Average lead time from the supplier for replenishment orders is eight days, and the company believes that it is also constant. The purchasing agent at Foods Galore believes that annual inventory carrying cost is 23 percent and that it costs $41.40 to prepare, send, and receive an order.
a1) How many cases of cereal should Foods Galore order each time it places an order?
a2) What will be the average inventory?
a3) What will be the inventory turnover rate?
a4) Calculate the total annual cost of ordering at the $21.40 price.
b) Foods Galore conducts an in-depth analysis of its inventory management practices and discovers several flaws in its previous approach. First, they find that by ordering 10,000 or more cases each time, they can obtain a price of $19.40 per case from the supplier.

b1) Calculate the total annual cost of ordering at the $19.40 price.

b2) What order quantity should Foods Galore place?

b3) How much they can save by placing the order for the above quantity?

c) In its analysis, Foods Galore determined that demand and lead time are not constant. In fact, demand has a standard deviation of 60 cases per day and lead time has a standard deviation of 1.5 days. Foods Galore management wants to evaluate two service level policies. One policy would incur a 5 percent risk of stockout while waiting for replenishment, the other only a 1 percent risk of stockout. What would be the cost of carrying the safety stocks for each of the two policies?

c1) carrying cost for 5 percent risk of stockout?
c2) carrying cost for 1 percent risk of stockout?