Cost of Prediction Error Ralph Menard has used the classic economic-lot-size model (with no stockouts) to compute an optimal order quantity for each of his raw materials and acquired parts. He initially predicts an annual demand of 2,000 units. Each unit has a supplier purchase price of $50. The incremental cost of processing an order is $40. The incremental cost of storage is $4 per unit plus 10 percent of supplier purchase price.

. The total “relevant” or “associated” costs of this inventory policy.

. Suppose that Ralph is precisely correct in all his predictions but he is wrong about the purchase price. If he had been a faultless predictor, he would have foreseen that the purchase price would have dropped to $30 at the beginning of the year and would have been unchanged throughout the year. What is the cost of the prediction error? lop5