Question

Deep Six Seafood, a restaurant that’s open 360 days a year, specializes in fresh Maine lobsters at a cost of $12.50 each. Air freight charges have increased significantly and it now costs Deep Six $50 to place an order. Because the lobsters are shipped live in a saltwater tub, the ordering cost is not affected by order sizes. The cost to keep a lobster alive until needed runs about $0.02 per day. The demand for lobsters during the 1-day lead time is as follows:

Lead-time Demand:	Probability:
0	.10
1	.30
2	.25
3	.20
4	.05
5	.10

Using the information in the previous problem, if Deep Six insists on maintaining a safety stock of 2 lobsters, at what reorder point should Deep Six place another order?

	a.	5
	b.	12
	c.	14
	d.	35
	e.	40

ANSWER A IS INCORRECT- not 5

Answer 1

Solution:

Given that

Deep Six Seafood, a restaurant that’s open 360 days a year

Maine lobsters at a cost of $12.50 each

Now costs Deep Six $50 to place an order

Lobster alive until needed runs about $0.02 per day

The economic order quantity is ((2*Fixed cost*Total units Demand)/carrying cost) 1/2

So the EOQ for first will be (2*4*50/0.02)1/2

= the answer will be 40

We have to first find the minimum quantity demanded that will be got by getting the total investment divided by price per lobster.