The penalty cost p used in the shortage model is usually difficult to estimate. As an alternative, a company might use a service-level constraint, such as, “95% of all demand must be met from on-hand...

The penalty cost p used in the shortage model is usually difficult to estimate. As an alternative, a company might use a service-level constraint, such as, “95% of all demand must be met from on-hand inventory.” Solve Problem 35 with this constraint instead of the $20,000 penalty cost. Now the problem is to minimize the total annual ordering and holding costs subject to meeting the service-level constraint.