EOQ Model - Inventory Level - Optimal Replenishment Policy - Management Assignment Help

Assignment Task:

EOQ Model Inventory Level Management Assignment Help

Exercise A 

In the settings of the EOQ model it was assumed that no backorder is allowed and hence if there is no lead time, a replenishment order is placed when the inventory level reaches 0. However, it may be possible that customers are ready to accept some waiting time before they receive their orders. Of course, there is a penalty for having units of product in backorder; assume that this penalty is equal to q for every unit of the product value in backorder for one unit of time. 

(a) Discuss how this backorder possibility can affect the optimal replenishment policy, under the settings of the EOQ model. Under what condition it may be beneficial to have a backorder? Provide an illustration of the inventory level over time. 

(b) Determine the decision variables of the EOQ model with backorders and derive the expression of the total relevant cost as a function of decision variables. Find the optimal values of determined decision variables that minimize the total relevant cost. 

Exercise B 

Fred runs a newsstand in the airport, where daily Financial Journal newspaper is sold. He purchases copies of the newspaper for $1.50 per copy, sells it for $2.50 each, and receives the refund of $0.50 for every unsold paper. The number of requests for newspaper ranges from 15 to 18 every day. Fred estimates that there are 15 requests in about 40% of days, 16 requests in 20% of days, 17 requests in 30% of days. 

(a) How many copies should he order every day to minimize the expected cost? 

(b) Suppose Fred does not identify the correct quantity but uses the quantity 15 for ordering newspapers. What is his average loss compared to optimal policy? 

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