Derive the economic order quantity model, beginning with a definition of terms and graph of cost curves
What will be an ideal response?
Answer: S is the cost to place a single order from a supplier.
H is the cost to hold one unit in inventory for a year.
D is the demand for the item for one year.
Q is the quantity ordered from the supplier.
The total cost is defined as:
TC = ordering cost + carrying cost
TC = cost to place 1 order × # orders per year + average inventory × cost to hold 1 item
TC = S + H
To find the minimum point on the total cost line, take the first derivative of the total cost equation with respect to Q and set the result equal to zero as follows:
TC = +
= + = 0
=
Q2 =
Q =
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