Palin’s Muffler Shop has one standard muffler that fits a large variety of cars. The shop wishes to establish a periodic review system to manage inventory of this standard muffler. Use the information

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Palin’s Muffler Shop has one standard muffler that fits a large variety of cars. The shop wishes to establish a periodic review system to manage inventory of this standard muffler. Use the information in the following table to determine the optimal inventory target level (or order-up-to level).

Annual demand                                     3,770   mufflers               Ordering cost         $50per order

Standard deviation of daily demand                6 mufflers per working day       Service probability 83%

Item cost                                             $28.00per muffler       Lead time 2working days

Annual holding cost 30% of item value                 Working days 290per year

Review period   18working days

a. What is the optimal target level (order-up-to level)? (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.)

b. If the service probability requirement is 96 percent, the optimal target level will:

multiple choice

  • Increase
  • Decrease
  • Stay the same
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