Full fixed cost recovery lot sizing with quantity discounts |
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Authors: | RR Britney PJ Kuzdrall N Fartuch |
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Institution: | The University of Western Ontario, School of Business Administration, London, Canada. |
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Abstract: | Purchasers must often make lot sizing decisions when facing price schedules of price-quantity discounts. It is important to determine the supplier's pricing philosophy when establishing a solution procedure.One approach is to evaluate total costs at all of the appropriate break points. This offers limited information: a lot size and a set of total costs. This is especially true in the case of full fixed cost recovery pricing. In actual practice price schedules can be extremely lengthy: indeed, it may be in the supplier's best interests to offer comprehensive discount schedules. This situation complicates the purchaser's decision making process.An efficient alternative, which solves the price-quantity discount problem when the supplier insists on a full fixed cost recovery schedule, is presented. Computations are reduced to a few simple steps; the result is a least total cost lot size for a simple linear package price model given parameters obtained by an appropriate analysis of the supplier's price-quantity discount schedule. A starting point is determined and the choice of the lot size is made using a simple criterion. Rapid convergence is assured, given a reasonably well-behaved schedule. |
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