Inflation, Taxes, and Optimal Inventory Policies

Abstract

Although numerous inventory order quantity models have been pro- posed, few have incorporated inflation and taxes, two pervasive facets of our economic environment. When inventory costs are changing, optimal order quantity decisions will be influenced by tax incentives which depend on firms' cost flow assumptions. Optimal cost flow choices, in turn, will depend on ordering policies. Thus, firms have incentives to optimize simultaneously over ordering policies and cost flow assumptions. This study is the first to examine this joint optimization. Using a model developed in Biddle and Martin [1983b], results are obtained regarding the forms of optimal ordering policies under alternativ..