Nichols Department

Problem 20-30 (Algo)

It is your responsibility, as the new head of the automotive section of Nichols Department Store, to ensure that reorder quantities for the various items have been correctly established. You decide to test one item and choose Michelin tires, XW size 185 × 14 BSW. A perpetual inventory system has been used, so you examine this, as well as other records, and come up with the following data:

Cost per tire         $40 each

Holding cost               20percent of tire cost per year

Demand                     1,060per year

Ordering cost                 $22per order

Standard deviation of daily demand    5tires

Delivery lead time                 6days

Because customers generally do not wait for tires but go elsewhere, you decide on a service probability of 95 percent. Assume the demand occurs 365 days per year.

a. Determine the order quantity. (Round your answer to the nearest whole number.)

b. Determine the reorder point. (Use Excel’s NORMSINV() function to find the correct critical value for the given α-level. Do not round intermediate calculations. Round “z” value to 2 decimal places and final answer to the nearest whole number.)