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A major component of the costs of many large firms is the cost associated with ordering and holding inventory. If the yearly demand for the good is D and the size of each order placed is q then the number of orders N in each year is:
N = D / q
If the cost of placing each order is C0 then the cost of placing all N orders is:
OC = C0N
The second component is the carrying or handling cost of an inventory. Under the assumption that the average number of items in stock is q/2 and with cost of each item set at p , the value of this average number of items is p(q/2). The carrying in this situation is the proportion Cn of this value:
The third component of total costs is simply the purchase cost of all the items, or . PC = pD = Assuming that C0, D, Cn and p are constant, what is the optimal order size q?
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Price/Feeder Quantity Demanded Quantity Supplied $300 500 1800 270 600 1700 240 700 1600 210 800 1500 180 1000 1400 150 1100 1300 120 1200 1200 90 1300 1100 60 1400 1000 30 1500 90
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