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A dealer supplies you the following information with regard to a product dealt in by him : Annual demand = 5,000 units, ordering cost = Rs.25.00 per order, inventory carrying cost is 30% per unit per year of purchase cost Rs.100 per unit.
The dealer is considering the possibility of allowing some back-orders to occur for the product. He has estimated that the annual cost of back-ordering the product will be Rs.10.00 per unit.
(I) What should be the optimum number of units of the product he should buy in one lot?
(II) What quantity of the product should he allow to be back-ordered ?
(III) How much additional cost will he have to incur on inventory if he does not permit back-ordering?
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