Analysis of a production order quantity model with declining unit cost

This paper improves upon the existing literature surrounding the production order quantity inventory model in which unit cost and daily production are assumed to be constant. By including economies of scale into the model, we examine its impact on production order quantity and total cost. The results suggest that the minimal cost solution derived from the production order quantity model needs to balance out holding, setup and production costs. As a result, a smaller inventory level corresponding to a minimum unit production cost is found to be preferred. -- production order quantity ; economic order quantity