The Japanese concept of JIT (Just In Time) advocates

| August 31, 2017

Question
Problem #7

The Japanese concept of JIT (Just In Time) advocates reducing set up cost as much as possible. To analyze this concept, consider the Economic Lot Size model with constant demand of D items per year, holding cost h$ per item per year and current set up cost K0. Suppose you can lease a new technology that allows you to reduce the set up cost from K0 to K at an annual leasing cost of A – Bln(K) dollars. That is, reducing the set up cost from the current set up cost, K0, to K will cost annually A – Bln(K) dollars. Of course, we assume that A – Bln(K0) = 0 which implies that using the current set up cost requires no leasing cost. What is the optimal set up cost? What is the optimal order quantity in this case?

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