A firm knows that the price of the product it is ordering is going to increase permanently by X dollars. It wants to know how much of the product it should order before the price increase goes into effect. Here is one approach to this problem. Suppose the firm places one order for Q units before the price increase goes into effect.
a. What extra holding cost is incurred by ordering Q units now?
b. How much in purchasing costs is saved by ordering Q units now?
c. What value of Q maximizes purchasing cost savings less extra holding costs?
d. Suppose that the annual demand is 1000 units, the holding cost per unit per year is $7.50, and the price of the item is going to increase by $10. How large an order should the firm place before the price increase goes into effect?