The annual demand for a particular chemical product is 1,200 units. Suppose that the annual holding cost is $24 per unit, and the ordering cost is $100. Part A: Find the optimal order quantity based on EOQ analysis, and calculate the combined annual ordering and holding cost. Part B: Now suppose that the store manager finds out that the demand has been underestimated. Specifically, the correct annual demand is 1,500 units. On the other hand, due to operational restrictions she cannot change the order quantity and thus use the same order size from part A. How much this error cost the store? (This can also be considered as a penalty for parameter misestimation).
The annual demand for a particular chemical product is 1,200 units. Suppose that the annual holding cost is $24 per unit, and the ordering cost is $100. Part A: Find the optimal order quantity based on EOQ analysis, and calculate the combined annual ordering and holding cost. Part B: Now suppose that the store manager finds out that the demand has been underestimated. Specifically, the correct annual demand is 1,500 units. On the other hand, due to operational restrictions she cannot change the order quantity and thus use the same order size from part A. How much this error cost the store? (This can also be considered as a penalty for parameter misestimation).
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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The annual demand for a particular chemical product is 1,200 units. Suppose that the annual
holding cost is $24 per unit, and the ordering cost is $100.
Part A: Find the optimal order quantity based on EOQ analysis, and calculate the combined
annual ordering and holding cost.
Part B: Now suppose that the store manager finds out that the demand has been underestimated.
Specifically, the correct annual demand is 1,500 units. On the other hand, due to operational
restrictions she cannot change the order quantity and thus use the same order size from part A.
How much this error cost the store? (This can also be considered as a penalty for parameter
misestimation).
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