The cost of inventory depends on the ordering and storage costs according to the inventory model . Determine the order size that will minimize the cost, assuming that sales occur at a constant rate, Q is the number of units sold per year, r is the cost of storing one unit for 1 year, s is the cost of placing an order, and x is the number of units per order.
I differentiated and got:
Not sure if this is right, and not sure how to verify it. I am always supposed to explain why there is a min at x = whatever, and I can't tell if the derivative is positive or negative because of all the variables...
December 3rd 2009, 08:25 AM
So you should get for the first derivative and for the second derivative. Setting the first derivative equal to zero and solving for x yields .
We only care about the positive solution since we can't order a negative number of units. The positive solution corresponds to a local minimum, since when x is positive, the second derivative is just the product of a bunch of positive quantities (Q and s can't be negative given what they represent, and has the same sign as x) and is therefore positive. The negative solution doesn't make sense, but even if it did, it corresponds to a local maximum since the second derivative is negative if x is negative.
Quite often you can write the derivatives as the product of a bunch of quantities. If this is the case, determining the sign of the derivative is simply a matter of determining how many of those quantities are negative.
If you wanted to check all this, I'd make up values for Q, s, and r and plot the cost function. If, for example, you let , you'd expect to see a local min at and a local max at .