A manager of an inventory system believes that inventory modelsare important decision-making aids. The manager has experience withthe EOQ policy, but has never considered a backorder model becauseof the assumption that backorders were “bad†and should be avoided.However, with upper management's continued pressure for costreduction, you have been asked to analyze the economics of abackorder policy for some products that can possibly bebackordered. For a specific product with D = 800 units per year, Co= $150, Ch = $5, and Cb = $30, what is the difference in totalannual cost between the EOQ model and the planned shortage orbackorder model? If the manager adds constraints that no more than25% of the units can be backordered and that no customer will haveto wait more than 15 days for an order, should the backorderinventory policy be adopted? Assume 250 working days per year.
