Optimal Price and Lot Size for an EOQ Model with Full Backordering under Power Price and Time Dependent Demand

Abstract

In this paper, we address an inventory system where the demand rate multiplicatively combines the effects of time and selling price. It is assumed that the demand rate is the product of two power functions, one depending on the selling price and the other on the time elapsed since the last inventory replenishment. Shortages are allowed and fully backlogged. The aim is to obtain the lot sizing, the inventory cycle and the unit selling price that maximize the profit per unit time. To achieve this, two efficient algorithms are proposed to obtain the optimal solution to the inventory problem for all possible parameter values of the system. We solve several numerical examples to illustrate the theoretical results and the solution methodology. We also develop a numerical sensitivity analysis of the optimal inventory policy and the maximum profit with respect to the parameters of the demand function.