An exchange curve can be used to display the trade-offs between the average investment in inventory and the annual ordering cost. To illustrate the usefulness of a trade-off curve, suppose that a company must order two products with the attributes shown in the file P12_66.xlsx.
a. Draw a curve that displays annual order cost on the horizontal axis and average inventory investment on the vertical axis.
b. Currently, the firm orders each product 10 times per year. Demonstrate that this is a suboptimal ordering policy.
c. Suppose management limits the company’s average inventory investment to $10,000. Use the exchange curve to determine the best ordering policy.
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