In the basic EOQ model, revenue is often omitted from the model. The reasoning is that all demand will be sold at the given selling price, so revenue is a fixed quantity that is independent of the order quantity. Change that assumption as follows. Make selling price a decision variable, which must be between $110 and $150. Then assume that annual demand is a nonlinear function of the selling price p: Annual Demand = 497000p-1.24. (This implies a constant elasticity of approximately -1.24 for the demand curve.) Modify the model in Example 12.1 as necessary and then use Solver to find the optimal selling price and order quantity. What are the corresponding demand and profit? Which appears to affect profit more in this model, order quantity or selling price?
Example 12.1
ORDERING CAMERAS AT MACHEY'S
Machey's Department Store sells 1200 cameras per year, and the demand pattern throughout the year is very steady. The store orders its cameras from a regional warehouse, and it usually takes one week for the cameras to arrive after an order has been placed. Each time an order is placed, an ordering cost of $125 is incurred. The store pays $100 for each camera and sells them for $130 apiece. There is no physical storage cost, but the store's annual cost of capital is estimated at 8% per year-that is, it can earn 8% on any excess cash it invests. The store wants to determine how often it should order cameras, when it should place orders, and how many cameras it should order in each order.
Objective To determine when to order and how much to order so that the store never runs out of cameras and profit is maximized.
