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Production quantity
Q
On-hand inventory
Demand during
production interval
Imax
Maximum inventory
p–d
Time
Production Demand
and demand only
TBO
Q pd
I max p d Q
p p
where
p = production rate
d = demand rate
Q = lot size
Q pd
H S
I max D D
C H S
2 Q 2 p Q
2 DS p
ELS
H pd
Q pd D
C H S
2 p Q
ELS 4,873.4
TBOELS
350 days/year 350
D 10,500
d. The production time during each cycle is the lot size divided
by the production rate:
ELS 4,873.4
25.6 or 26 days
p 190
Figure D.2 – OM Explorer Solver for the Economic Production Lot Size Showing the
Effect of a 10 Percent Reduction in Setup Cost
2 DS p 210,080 100,000 60
ELS 1,555.38
H pd 2,000 60 35
or 1,555 engines
Q 1,555
25.91 or 26 production days
p 60
I max Q p d 1,555 60 35
324 engines
2 2 p 2 60
Q pd
H S
I max D D
C H S
2 Q 2 p Q
1,555 60 35 10,080
$2,000 $100,000
2 60 1,555
$647,917 $648,231
$1,296,148
Q D
C H S PD
2 Q
(a) Total cost curves with purchased (b) EOQs and price break quantities
materials added
Figure D.3 – Total Cost Curves with Quantity Discounts
EXAMPLE D.2
A supplier for St. LeRoy Hospital has introduced quantity
discounts to encourage larger order quantities of a special
catheter. The price schedule is
The hospital estimates that its annual demand for this item is
936 units, its ordering cost is $45.00 per order, and its annual
holding cost is 25 percent of the catheter’s unit price. What
quantity of this catheter should the hospital order to minimize
total costs? Suppose the price for quantities between 300 and
499 is reduced to $58.00. Should the order quantity change?
SOLUTION
Step 1: Find the first feasible EOQ, starting with the lowest price
level:
2 DS 2936 $45.00
EOQ 57.00 77 units
H 0.25$57.00
2 DS 2936 $45.00
EOQ 58.80 76 units
H 0.25$58.80
2 DS 2936 $45.00
EOQ 60.00 75 units
H 0.25$60.00
Q D
C H S PD
2 Q
75
C 75 0.25 $60.00 936 $45.00 $60.00936 $57,284
2 75
300
C 300 0.25 $58.80 936 $45.00 $58.80936 $57,382
2 300
500
C 500 0.25 $57.00 936 $45.00 $57.00936 $56,999
2 500
The best purchase quantity is 500 units, which qualifies for the
deepest discount
Figure D.4 – OM Explorer Solver for Quantity Discounts Showing the Best Order Quantity
EXAMPLE D.3
One of many items sold at a museum of natural history is a
Christmas ornament carved from wood. The gift shop makes a
$10 profit per unit sold during the season, but it takes a $5 loss
per unit after the season is over. The following discrete
probability distribution for the season’s demand has been
identified:
Demand 10 20 30 40 50
SOLUTION
Each demand level is a candidate for best order quantity, so
the payoff table should have five rows. For the first row,
where Q = 10, demand is at least as great as the purchase
quantity. Thus, all five payoffs in this row are
This formula can be used in other rows but only for those
quantity–demand combinations where all units are sold during
the season. These combinations lie in the upper-right portion
of the payoff table, where Q ≤ D. For example, the payoff when
Q = 40 and D = 50 is
Demand Demand
(D) Probability
10 0.2
20 0.3
30 0.3
40 0.1
50 0.1
Q pd D
C H S
2 p Q
SOLUTION
We first calculate the EOQ at the lowest price:
2 DS 2490 $64.00
EOQ 49.00 6,400 80 packages
H 0.20$49.00
2 DS 2490 $64.00
EOQ 50.25 6,241 79 packages
H 0.20$50.25
This EOQ is feasible, but $50.25 per package is not the lowest
price. Hence, we have to determine whether total costs can be
reduced by purchasing 200 units and thereby obtaining a
quantity discount.
Q D
C H S PD
2 Q
79 490
C79 0.20 $50.25 $64.00 $50.25490
2 79
$396.98/year $396.68/year $24,622.50 $25,416.44/year
200 490
C200 0.20 $49.00 $64.00 $49.00490
2 200
$980.00/year $156.80/year $24,010.00 $25,146.80/year
Demand, D
Expected
Q 100 200 300 400 500 600 Payoff
100 $3,500 $3,500 $3,500 $3,500 $3,500 $3,500 $3,500
200 $2,500 $7,000 $7,000 $7,000 $7,000 $7,000 $6,775
300 $1,500 $6,000 $10,500 $10,500 $10,500 $10,500 $9,555
400 $500 $5,000 $9,500 $14,000 $14,000 $14,000 $10,805
500 ($500) $4,000 $8,500 $13,000 $17,500 $17,500 $10,525
600 ($1,500) $3,000 $7,000 $12,000 $16,500 $21,000 $9,750