1. avatar says

    Hello, How can it be certain that the total cost will be the minimum at the level at which we first get discount? eg: how can we know at quantity of 200, we can get the lowest cost instead of other between 200~499, like 300? although it is obvious that the holding cost will higher at 300 than 200, but the ordering cost will much lower? how can we decide?

    Looking for tutou’s advice

    • Profile photo of John Moffat says

      I do actually make this clear in the lecture!

      The minimum total inventory cost (reorder cost + holding cost) will occur at the EOQ. For any other order quantity, the total inventory cost will be higher. If you look again at the lecture I drew the graph and explained that it would be a curve with a minimum at the EOQ.

      From memory, I think that EOQ for this example was 160.
      With an order quantity of 200, the total inventory cost must be higher (think again from the graph, or simply check the numbers yourself) but it would be worthwhile because the purchase cost will be lower because of the discount.
      With an order quantity of 300, the total inventory will be higher still (think again of the graph, or check the numbers yourself). Since there is no extra discount it cannot possibly be any cheaper overall.

      The only possible cheapest total costs are at the EOQ and the levels we first get a discount.

Leave a Reply