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:
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