Problem:

Stationery Supplies provides office supplies such as desk accessories, notebooks and pads. The company does not produce internally the products but has a number of suppliers who deliver regularly the merchandise. Stationery Supplies had an inventory of 850 at the beginning of January 2010, and during the first six months of 2010 had the following history of supply and demand transactions:

The average cost for the office supplies was $10 per item from January to March, and $ 12 per item from April to June. Stationery Supplies uses a 12 percent annual interest rate to represent the cost of capital, and pays liability insurance for 3% of the value of the office supplies. The holding cost consists of both cost of capital and insurance cost and is incurred for the items that are in inventory at the end of each month.

Required:

Question 1) Determine the holding cost assuming that excess demands are back-ordered;

Question 2) Determine the holding cost assuming that excess demands are lost;

Question 3) Assuming that each time demand is not immediately satisfied the company incurs a goodwill-loss-cost of $2 per unit demanded and not supplied, calculate the total penalty cost if excess demands are back-ordered;

Question 4) Assuming that each time demand is not immediately satisfied the company incurs a goodwill-loss-cost of $2 per unit demanded and not supplied, calculate the total penalty cost if excess demands are lost.

Provide correct solution of the given problem with step by step calculations.