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Production runs to replenish inventory are made at regular intervals; During a production run, the production of items is continuous and at a constant rate; Production set-up/ordering cost is fixed (independent of quantity produced) The lead time is fixed; The purchase price of the item is constant, i.e. no discount is available
The figure graphs the holding cost and ordering cost per year equations. The third line is the addition of these two equations, which generates the total inventory cost per year. The lowest (minimum) part of the total cost curve will give the economic batch quantity as illustrated in the next section.
An example diagram of Profit Maximization: In the supply and demand graph, the output of is the intersection point of (Marginal Revenue) and (Marginal Cost), where =.The firm which produces at this output level is said to maximize profits.
The total cost curve, if non-linear, can represent increasing and diminishing marginal returns.. The short-run total cost (SRTC) and long-run total cost (LRTC) curves are increasing in the quantity of output produced because producing more output requires more labor usage in both the short and long runs, and because in the long run producing more output involves using more of the physical ...
Wire-grid Cobb–Douglas production surface with isoquants A two-input Cobb–Douglas production function with isoquants. In economics and econometrics, the Cobb–Douglas production function is a particular functional form of the production function, widely used to represent the technological relationship between the amounts of two or more inputs (particularly physical capital and labor) and ...
Economic order quantity (EOQ), also known as financial purchase quantity or economic buying quantity, [citation needed] is the order quantity that minimizes the total holding costs and ordering costs in inventory management. It is one of the oldest classical production scheduling models.
The reorder point (ROP), also reorder level (ROL) or "optimal re-order level", [1] is the level of inventory which triggers an action to replenish that particular inventory. It is a minimum amount of an item which a firm holds in stock, such that, when stock falls to this amount, the item must be reordered.
It is often represented as a curve in a graph with quantities of two inputs, typically physical capital and labor, plotted on the axes. A producer seeking to produce a given number of units of a product in the cheapest possible way chooses the point on the expansion path that is also on the isoquant associated with that output level.