Suppose That You Are the Manager of a Production Department

question 108

Essay

Suppose that you are the manager of a production department that uses 400 boxes of rivets per year.The supplier quotes you a price of $8.50 per box for an order size of 199 boxes or less, a price of $8.00 per box for orders of 200 to 999 boxes, and a price of $7.50 per box for an order of 1,000 or more boxes.You assign a holding cost of 20 percent of the price to this inventory.What order quantity would you use if the objective is to minimize total annual costs of holding, purchasing, and ordering? Assume ordering cost is $80/order.

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Definitions:

Risk-Free Rate

The hypothetical return rate on an investment that carries no risk of losing money, commonly illustrated by the interest rate on government securities.

Multifactor Model

A financial model that employs multiple factors in its calculations to explain market phenomena and/or equilibrium asset prices.

Unanticipated Inflation

Inflation that occurs when the actual rate exceeds what was expected, potentially eroding purchasing power and investment returns.