In Some Inventory Models, the Optimal Behavior Occurs When Ordering

question 177

Essay

In some inventory models, the optimal behavior occurs when ordering costs and carrying costs are equal to one another. Provide an example of a model where this rule does not hold; explain how the model's results are optimal anyway.

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Definitions:

Effective Interest Rate Method

A method of amortizing the discount or premium on bonds payable that reflects the constant rate of interest over the life of the bond.

Amortization Schedule

An Amortization Schedule is a table detailing each periodic payment on an amortizing loan, including the amount of principal and the amount of interest that comprises each payment until the loan is paid off at the end of its term.

Bond Carrying Amount

The net value of a bond on a balance sheet, which may differ from its face value due to amortization or market changes.

Premium Amortization

The process of gradually reducing the premium paid on bonds purchased above their face value over the life of the bonds.