Economies of Scale to Exploit Fixed Costs

Lot Sizing for a Single Product (Economic Order Quantity) 

As Best Buy sells its current inventory of HP computers, the purchasing manager places a replenishment order for a new lot of Q computers. Including the cost of transportation. Best Buy incurs a fixed cost of S per order. The purchasing manager must decide on the number of computers to order from HP in a lot. For this decision, we assume the following inputs  

Assume that HP does not offer any discounts, and each unit costs C no matter how large an order is. The holding cost is thus given by H=hC (using Equation 11.2). The model is developed using the following basic assumptions  

No shortages are allowed— that is, aU demand must be supplied from stock. 

Replenishment lead time is fixed (initially assumed to be zero). 

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