Suppliers frequently offer quantity discounts to their customers to entice large orders. Consider the following incremental quantity

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Suppliers frequently offer quantity discounts to their customers to entice large orders. Consider the following incremental quantity discount schedule.

Units ordered ................ Price per unit
1−1,000 .............................. $50.00
1,001−5,000 ....................... $50.00 for the first 1000 units and $45.00 for units ordered between 1,001 and 5,000
≥ 5,000 ................................ $50.00 for the first 1000 units, $45.00 for the next 4,000 units,
                                                and $40.00 for any units ordered beyond 5,000


With the help of binary variables, an incremental quantity discount schedule can be incorporated into a mixed integer program that determines order size. Let Q be a decision variable that represents the total amount purchased. Let qi be a decision variable that represents the total amount purchased within interval i of the price schedule. Thus, Q will equal q1 + q2 + q3. Also, let Yi be a binary variable that equals 1 if Q lies in any higher interval than interval i of the price schedule (i.e., if Q would yield a lower marginal price than the price in interval i), and 0 otherwise. For example, if 5,200 units are ordered, Q = 5,200, q1 = 1,000, q2 = 4,000, q3 = 200, Y1 = 1, and Y2 = 1. On the other hand, if only 3,200 units are purchased, Q = 3,200, q1 = 1,000, q2 = 2,200, q3 = 0, Y1 = 1, and Y2 = 0.

Using these definitions, the purchasing cost in the objective function will then equal 50q1 + 45q2 + 40q3. One of the new constraints added to the program will be Q = q1 + q2 + q3. In addition to nonnegativity and binary constraints, what additional four constraints need to be added to ensure that the correct price is charged for the amount purchased? Define M as a very large number, and use it in one of the new constraints.

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Managerial Decision Modeling Business Analytics With Spreadsheet

ISBN: 9781501515101

4th Edition

Authors: Nagraj Balakrishnan, Barry Render, Ralph Stair, Charles Munson

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