Almost all organizations find it necessary to maintain

Chapter 9, Problem 9.2.17

(choose chapter or problem)

Almost all organizations find it necessary to maintain inventories of goods that are costly to maintain. For example, if the dollars were not invested in inventory, they could be used profitably elsewherefor salaries, new production, and so on. These dollars are called holding costs. On the other hand, carrying a small inventory means ordering more often, which also incurs costs, called ordering (or made-to-order) costs. The graph below shows the behavior of the holding costs H(q), ordering costs O(q), and total inventory costs T(q) as functions of q, the quantity of the order. a. Use the graph to create a function for T(q) in terms of H(q) and O(q). b. The economic order quantity, q*, is the intersection of H(q) and O(q). What happens at this intersection point? What do you think this means in terms of the total cost?