In Some Inventory Models, the Optimal Behaviour Occurs Where Ordering

question 54

Essay

In some inventory models, the optimal behaviour occurs where 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:

Employee Benefits

All forms of consideration given by an entity in exchange for service rendered by employees or for the termination of employment.

Insurance Contracts

Contracts under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specific uncertain future event adversely affects the policyholder.

Warranty Obligations

Liabilities recognized by a company to cover the costs of repairs or replacements for products sold within a specified warranty period.

Discount Rate

The interest rate used to discount future cash flows of a financial instrument to present value.