Cost, Revenue,Profit Models

• Total Cost function: C(x) = cx + F

• Revenue function: R(x) = sx Revenue function: R(x) =
sx
• Profit function: P(x) = R(x) – C(x) = sx – (cx + F) = (s –
c)x – F
The cost to make a sofa is P600 per sofa plus a fixed
setup cost of P4,500. Each sofa sells for P750.
1. What is the cost to manufacture 20 sofas?
2. What is the cost to manufacture x sofas?
3. How much revenue is generated from selling 20
sofas at P750 each?
4. How much gain is generated from selling 20 sofas at
P750 each?
Inventory Model

Management Science
Inventory Model

Management Science
Objectives
• To understand the importance of Inventory control
• Solve inventory problems by the use of the Economic
Order Quantity to determine how much to order
• Compute the types of costs such as ordering cost,
holding cost, direct production cost and shortage
cost
• Know the importance of inventory models and their
application
• Inventory is one of the most expensive and
important assets to many companies representing as
much as 50% of total invested capital.
• A good inventory control is crucial .
Slide Title
• Managers should solve the dual
problems of maintaining sufficient
inventory to meet demand for goods
and at the same time incurring the
lowest inventory holding cost by
making the best possible decisions.
• Hoq much should be ordered when the
inventory for a given time is
replenished?
• When should the inventory for a given
item be replenished?
Five basic costs associated with
inventories
• Cost of the items
• Cost of ordering
• Cost of carrying or holding an inventory
• Cost of safety stock
• Cost of stockouts
Ordering costs
• Costs associated with the costs of
placing an order and receiving
inventory.
– Example: salaries of the purchasers,
developing and sending purchase
orders, bill paying, typing of invoices,
inspecting upon arrival, phone bills
to make an order
Carrying cost
• Cost dependent on the size of the
inventory .
• Costs of maintaining and owning the
inventory
Examples: cost of capital, interest,
insurance, taxes, depreciation,
spoilage and salaries for
warehousemen
Inventory cost Factors

Ordering Cost Factors Carrying Cost Factors

• Bill Paying • Insurance
• Inventory inquiries • Spoilage
• Processing and inspecting • Utilities and building costs
• supplies such as forms and for the warehouse supplies
paper for the purchasing such as forms and paper for
department the warehouse
Economic order quantity (EOQ)
• is the ideal order quantity a company should
purchase to minimize inventory costs such as
holding costs, shortage costs, and order costs.
• This production-scheduling model was
developed in 1913 by Ford W. Harris and has
been refined over time.
• The formula assumes that demand, ordering,
and holding costs all remain constant.
• Jen printers cost to order is P 108 , the
cost to carry an item in inventory is P
75; and if the company requires 5,000
cans of ink during the year.
• Answer 120
 validation
total cost
Total cost to to carry
Number of order 108 Average average
orders 5k *no of Inventory inventory
order size /order size orders order/2 * 75 Total cost
80 63 6,750 40 3000 9,750
100 50 5,400 50 3750 9,150
120 42 4,500 60 4500 9,000
140 36 3,857 70 5250 9,107
160 31 3,375 80 6000 9,375
• The Arni Ganda Company has a soft drinks
product that has a constant annual
demand rate of P 108,000 cases a year . A
case of soft drink costs ABC Corporation P
324. Ordering cost is P 300 per order and
inventory carrying cost is charged at 20%
of the cost per unit. Calculate the
economic order quantity .
Formula

Answer : 1,000 cases

 total cost
Number Total cost to carry
of orders to order Average average
5k /order 108 *no of Inventory inventory *
order size size orders order/2 75 Total cost
500 216 64,800 250 16,200.00 81,000
750 144 43,200 375 24,300.00 67,500
1000 108 32,400 500 32,400.00 64,800

1250 86 25,920 625 40,500.00 66,420

1500 72 21,600 750 48,600.00 70,200

A television manufacturer buys wooden
cabinet from outside supplier at P 400
per set. Total annual needs are 5,000
sets at a rate of 20 sets per working
day. The following costs data are
available: Ordering cost P 50; Carrying
cost P 50.
EOQ

100 units
=