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Handyman Inc. operates a chain of hardware stores across New England. The controller wants to
determine the optimum safety stock levels for an air purifier unit. The inventory manager has compiled the
following data.
. The annual carrying cost of inventory approximates 20 percent of the investment in inventory.
. The inventory investment per unit averages $50.
. The stockout cost is estimated to be $5 per unit.
. The company orders inventory on the average of ten times per year.
. Total cost = carrying cost + expected stockout cost.
. The probabilities of a stockout per order cycle with varying levels of safety stock are as follows.

The total cost of safety stock on an annual basis with a safety stock level of 100 units is:
A. $1,750
B. $2,000
C. $1,950
D. $650
Answer: A
Choice "a" is correct. $1,750 total annual cost of safety stock of 100 units.

Choices "b", "c", and "d" are incorrect, per the above calculation.

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