Question

Stephen owns an importing wholesaler selling tilapia fish fillets that are imported from Uganda to South Africa. Recently Stephen has seen demand for the imported fillets soar as the local market demand for the fish has grown considerably. He has, however, been experiencing what he feels are frequent stock-outs and is considering keeping safety stock to avoid this in future. So far Stephen has used his experiences to create a probability distribution of demand in an average lead time: Demand in lead time Probability 500 0,10 1000 0,40 1100 0,30 1200 0,20 Sum 1,00 One fillet (one unit) sells for R20, while it costs R10. Stephen has estimated his carrying cost per unit at R2, while his order costs per order is R1000. His business usually sells 25 000 fillets per year. Required for question 10: Using the above information, determine the EOQ for Stephens’s business. Using the above information, determine how much safety stock Stephen should hold for his business. [Note the mark allocation for this question is 3 marks]

A. 0 units

B. 80 units

C. 180 units

D. 260 units

Answer 1

Solution:

The solution to the problem is as provided below:

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Economic Order Quantity (EOQ) is a technique that is used to define the frequency and volume of orders required to satisfy a particular level of demand while keeping the cost per order at a minimum. The formula to calculate EOQ is as shown below:

Where,

S is Ordering cost = R1000 per order

D is Annual quantity demanded = 25,000 fillets

H is Holding cost = R2

So, the Economic Order Quantity is 5000 units.

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Safety Stock calculation:

From given data, we tabulate the following table,

Daily Demand	Probability
500	0.1
1000	0.4
1100	0.3
1200	0.2

Average Demand per day = (500*0.1) + (1000*0.4) + (1100*0.3) + (1200*0.2) = 50 + 400 + 330 + 240 = 1020 units

Safety stock is the difference between maximum demand and average demand. In this case,

Safety Stock (SS) = Maximum Demand - Average Demand = 1200 - 1020 = 180 units

So, correct option is c - 180 units.