Common Scents, Inc., makes various scents for use in the manufacture of food products. Although the company does maintain a safety stock, it has a policy of maintaining “lean” inventories, with the result that customers sometimes must be turned away. In an analysis of the situation, the company has estimated the cost of being out of stock associated with various levels of safety stock:
|
|
LEVEL OF SAFETY STOCK (in gallons)
|
ANNUAL COST OF STOCKOUTS
|
|
Present safety stock level |
5,000 |
$26,000 |
|
New safety stock level 1 |
7,500 |
14,000 |
|
New safety stock level 2 |
10,000 |
7,000 |
|
New safety stock level 3 |
12,500 |
3,000 |
|
New safety stock level 4 |
15,000 |
1,000 |
|
New safety stock level 5 |
17,500 |
0 |
Carrying costs are $0.65 per gallon per year. What is the best level of safety stock for the company?