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THE CLASSIC ECONOMIC PRODUCTION QUANTITY MODEL WITH SETUP COST AS A FUNCTION OF CAPITAL EXPENDITURE *
Author(s) -
Billington Peter J.
Publication year - 1987
Publication title -
decision sciences
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.238
H-Index - 108
eISSN - 1540-5915
pISSN - 0011-7315
DOI - 10.1111/j.1540-5915.1987.tb01501.x
Subject(s) - production (economics) , function (biology) , capital (architecture) , total cost , cost of capital , cost reduction , economics , reduction (mathematics) , microeconomics , capital cost , mathematical optimization , production function , relevant cost , production cost , computer science , mathematics , macroeconomics , engineering , profit (economics) , history , geometry , management , archaeology , evolutionary biology , biology , mechanical engineering
The formulation of the classic economic production quantity (EPQ) model is extended to include setup cost as a function of capital expense. Additional capital will buy reduced setup cost. Thus, the objective now is to balance holding, setup, and capital expenses. This new formulation is solved under conditions where setup cost varies exponentially and linearly as a function of capital expense. Decision rules are formulated to indicate under what conditions setup cost reduction reduces total cost. For the linear function, it is shown that once the decision to reduce setup cost is justified, the optimal choice is the minimum setup cost that is technologically feasible.