Suppose that instead of measuring shortage in terms of cost per shortage per year, a cost of P dollars is incurred for each unit the firm is short. This cost does not depend on the length of time...

Suppose that instead of measuring shortage in terms of cost per shortage per year, a cost of P dollars is incurred for each unit the firm is short. This cost does not depend on the length of time before the backlogged demand is satisfied. Determine a new expression for the annual shortage cost as a function of Q and b, and solve GMB’s problem (Example 13.3) with this way of costing shortages for reasonable values of P. (What values of P do you think are reasonable?)

Example 13.3