Problem
Suppose you distribute 11 oz. FrozGood frozen dinner packages in the Delaware valley. The demand, which we assume to be constant, for this product is 100,000 packages annually. The annual holding cost for each package in your freezer is 33% of the price you pay for it, and the cost to process each order is $50. You buy these packages in lots that are delivered immediately, but the price you pay for each package depends on the quantity you order at a time. The price schedule offered to you is the following:
P1 = $2.35 ea. if you buy less than 25,000 packages at once
P2 = $2.30 ea. if you buy at least 25,000 packages at once.
I. What is the optimal policy? What is the total annual inventory cost associated with this policy? (Show your work.)
II. How many orders do you process per year? What period of time will each order last?
III. If your freezers could only hold 3,000 FrozGood frozen dinners at a time, would this affect your policy? Why or why not? In other words, describe what, if anything, will change from your answer in part (I).