Case 9-1: Low Nail Company

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CASE 9-1: LOW NAIL COMPANY
Question 1: Using the EOQ methods outlined in chapter 9, how many kegs of nails should Low order at one time? The EOQ formula is:
EOQ = √ 2 (annual use in units) (cost of placing an order) / annual carrying cost per item per year
= √ 2 (2000) (60) / 2
= √ 120,000
= 345 kegs per order
Note the 2 in the denominator. That is because, on average, the rented warehouse space is only half full, which, makes the average warehousing cost per keg be $2. Question 2: Assume all conditions in question 1 hold, except that Low’s supplier now offers a quantity discount in the form of absorbing all or part of Low’s order processing costs. For orders of 750 or more kegs of nails, the supplier will absorb all the order processing costs; for orders between 249 and 749 kegs, the supplier will absorb half. What is Low’s new EOQ? (It might be useful to lay out all costs in tabular form for this and later questions.) Orders/year| Order size| Processing costs ($)| Warehousing costs ($)| Sum of processing and warehousing costs ($)| 1| 2,000| Free| 2,000| 2,000|

2| 1,000| Free| 1,000| 1,000|
3| 667| 90| 667| 757|
4| 500| 120| 500| 620|
5| 400| 150| 400| 550|
6| 334| 180| 334| 514|
7| 286| 210| 286| 496|
8| 250| 240| 250| 490|
9| 223| 540| 223| 743|
| | | | |
The new EOQ, based on the above information, is 250 kegs.
Question 3: Temporarily, ignore your work on question 2. Assume that Low’s warehouse offers to rent Low space on the basis of the average number of kegs Low will have in stock, rather than on the maximum number of kegs Low would need room for whenever a new shipment arrived. The storage cost per keg remains the same. Does this change the answer to Question 1? If so, what is the new answer? The relevant table is as follows:

Orders/year| Order size| Processing costs ($)| Warehousing costs ($)| Sum of processing and warehousing costs ($)| 1| 2,000| 60| 1,000...
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