Situation 7. A restaurant uses 5,000 quart bottles of an imported wine each year. The effervescent wine costs $3.25 per bottle and is served only in whole bottles because it loses its bubbles quickly. It costs $15 each time an order is placed, and holding costs are 25 percent of the purchase price. It takes three weeks for an order to arrive. Weekly demand is 100 bottles with a standard deviation of 35 bottles. The restaurant would like to use an inventory system that minimizes inventory cost and will provide a 95 percent service probability.
a. What is the economic quantity for the restaurant to order?
b. At what inventory level should an order be placed?
c. Explain the implications of a and b.