b. What should the reorder level be to achieve an average of 1 stockout in 10 years
(assume that demand is normally distributed)
c. How much safety stock is included in your answer to (b) above?
d. How much reduction would there be in safety stock if the average lead time were
reduced by 50%?
e. How much reduction would there be in safety stock if the forecast error (MAD)
were reduced by 50%?
f. What significance do the answers to (e) and (d) have for a manager?
4. Dallas allows an employee to put an amount into an account at the beginning of each
year, to be used for child-care expenses. This amount is not subject to federal income tax.
Assume that all other income is taxed by the federal government at a 40% rate. If this
amount can only be used for childcare expenses. If the amount is more than the childcare
expenses, the difference is lost. If the childcare expenses are more than the amount, the
employee must pay for the excess out of his/her own pocket. This excess payment can be
claimed in an income tax return to receive tax credit at the rate of 25% of the excess
payment. Prof. Cakanyıdeım believes that his childcare expenses for his son for the
coming year will be $3000, $4000, $5000, $6000, or $7000 with equal probabilities. At
the beginning of the year, how much money should he place in the child-care account?