A dealer supplies you the following information with regard to a product dealt with by him:

The dealer is considering the possibility of allowing some back-order (stockout) to occur. He has estimated that the annual cost of back-ordering will be 25% of the value of inventory.

(a) What should be the optimum number of units of the product he should buy in one lot?

(b) What quantity of the product should be allowed to be back-ordered, if any?

(c) What should be the maximum quantity of inventory at any time of the year?

(d) Would you recommend to allow back-ordering? If so what would be the annual cost saving by adopting the policy of back-ordering?

Transcribed Image Text:

Annual demand Ordering cost Inventory carrying cost Price : 10,000 units Rs 10 per order 20% of the value of inventory per year Rs 20 per unit