Question

A manager of an inventory system believes that inventory models are important decision making aids. The manager has experience with the EOQ policy, but has never considered a backorder model because of the assumption that backorders were "bad" and should be avoided. However, with upper management's continued pressure for cost reduction, you have been asked to analyze the economics of a backorder policy for some products that can possibly be backordered.

For a specific product with

D = 700

units per year,

C_o = $140,

C_h = $3,

and

C_b = $20,

what is the difference in total annual cost between the EOQ model and the planned shortage or backorder model (in $)? (Round your answer to two decimal places.)

$

Answer 1