Abstract
This paper builds on the model of Yoo, Kim, and Park (S. H. Yoo, D.S. Kim, and M.-S. Park, "Economic production quantity model with imperfect-quality items, two-way imperfect inspection and sales return," International Journal of Production Economics, vol. 121 (1), pp. 255-65, 2009) and extend their model by considering the possibility that the producer can permit shortages which the producer can utilize to reduce the costs of inventory. The coverage of the model offers alternative and simplified modeling approach to the model. The concavity of the expected total profit function is proved under certain conditions. The concept is illustrated through a numerical example. It has been illustrated that the EPQ model with shortages is effective for certain ranges of the defective proportion and the probability of the Type 1 error; outside these ranges, the model with unpermitted shortages must be implemented.