An optimum scrap allowance, a*, is defined as that value of a which maximizes the return function where n is the nominal lot requirement, x the number of scrapped units, μ the cost per unit of surplus, arid ø the penalty cost which results when the actual scrap exceeds the allowance. The value a* is determined by an algorithm for which the computing problem is viewed as a multiple-stage problem, as in dynamic programming. Numerical examples are given for the cases where the scrap probabilities are binominal or Poissonian.
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Bernard Giffler (1960) studied this question.