3. The ICU Optical Clinic has recently introduced a new line of eyeglasses that incorporates a

highly fashionable frame and special lenses that darken in sunlight and lighten indoors, thus

eliminating the need to purchase a separate pair of sunglasses. ICU purchases frames for the

glasses from an outside vendor. The lenses are manufactured on site. The clinic has recently

noted the following demand distribution for its new glasses:

Demand/month

12

13

14

15

16

17

18

19

Probability

0.10

0.15

0.15

0.20

0.20

0.10

0.05

0.05

Purchase price to the ICU Optical Clinic is $30 per frame. The clinic has an ordering cost of $25.

Cost of carrying inventory is 25 percent of the item value per unit per year. Order lead time is

constant at one month. The work year consists of 12 months.

a. Compute the economic order quantity for the frames ICU purchases.

b. Compute the reorder point and buffer stock level for a 99 percent customer service level.

Assume order quantity and reorder point can be computed independently.

e. What's the total annual cost of carrying the buffer stock computed in part b?