This paper analyzes an inventory system for joint determination of product quality and selling price where a fraction of items produced are defective. It is assumed that only a fraction of defective items can be repaired/reworked. The demand rate depends upon both the quality and the selling price of the product. The production rate, unit price, and carrying cost depend upon the quality of the items produced. Quality index is used to determine the quality of the product. An algorithm is provided to solve the model with given values of model parameters. Sensitivity analysis has also been performed. 1. Introduction In every business, product quality is an important factor that attracts customers. For durable goods, quality depends upon several factors. Some of such factors are type/quality of the raw materials used, type/quality of the machines used in the production process, skills of workers engaged in the production system, and so forth. It is obvious that the unit cost for a high quality product will be high. In general, unit cost increases with quality. Quality measure is an important issue in all production systems. There is no well-defined method for measuring quality. In fact, quality characteristics are not the same for all types of items. It varies from one type of items to another type. There are several research articles on quality measure. Maynes [1] described the concept of evaluating quality index as a measure of quality for durable goods. He suggested to combine characteristics of variety and the characteristics of seller to evaluate quality index. Jiang [2] defined quality index as a ratio of two different life measures based on fractile life; one represents life utilization extent and the other represents the quality improvement potential. He derived quality index formulae for several known lifetime distributions. Some authors proposed quality index method to measure quality of sea foods. Huidobro et al. [3] proposed quality determination method for raw Gilthead seabream (Sparusaurata) based on the quality parameters—flesh elasticity, odor, clarity, shape of fish. Barbosa and Vaz-Pires [4] proposed the development of a sensorial scheme to measure quality of common octopus. Though customers have the tendency to buy a high quality product, sometimes due to high price they compromise with the quality. Thus, a challenging task for a production manager is to produce units in suitable quality and setting a reasonable selling price for these units. Normally, customers’ demand decreases when selling price increases. In some production systems,
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