I would like to summarize this section, with an example for clarification, please

Accounting for inflation

One of the assumptions in the derivation of the economic order quantity was that the inflation rate was at a negligible level. But in recent times many countries have been confronted with fluctuating inflation rates that often have been far from replenishment quantities.

negligible. In this section we investigate the impact of inflation on the choice of There are several options available for modeling the effects of inflation on costs and revenues. We restrict our attention to the case where the fixed replenishment cost A and the unit variable cost v are affected in the same fashion by inflation. A more elaborate model would be necessary if inflation had a different impact on the two types of costs. Moreover, the effects on revenue depend on the choice of pricing policy adopted by the organization (possibly subject to government regulation). In Section 5.6.1 we investigate the case where (selling) price changes are made independent of the replenishment strategy. A special case is where the unit selling price p is assumed to increase continuously at the inflation rate (in the same fashion as A and v. Then, in Section 5.6.2, the result will be shown for the situation where the price is adjusted only once for each replenishment lot. Thus, in this latter case, revenue, as well as costs, now depends on the sizes of the replenishments.

An exact analysis in the presence of inflation would be extremely complicated.

The reason for this is that costs varying with time, in principle, should lead to the replenishment quantity changing with time. At any point in time our primary concern is with choosing the value of only the very next replenishment. To obtain a tractable analytic result, we assume that all future replenishments will be of the same size as the current replenishment, contrary to what the earlier discussion would suggest. This assumption is not as serious as it would first appear. In particular, at the time of the next replenishment we would recompute a new value for that replenishment, reflecting any changes in cost (and other) parameters that have taken place in the interim. Second, we employ discounting so that assumptions about future lot sizes should not have an appreciable effect on the current decision.

This is an illustration of a heuristic solution procedure, a method, based on analytic and intuitive reasoning, that is not optimal but should result in a reasonable solution.

Finally, we do not treat the case where quantity discounts are available. When discounts are available, the best order quantity may be very insensitive to inflation because the breakpoint value often is the best solution over a wide range of parameter values (Gaither 1981).