Case 9-1: Low Nail Company Essay

902 Words Oct 3rd, 2012 4 Pages
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 $2.
Question 2: Assume all conditions in question 1 hold, except that Low’s supplier now offers a quantity discount in the form of absorbing all or part of Low’s order processing costs. For orders of 750 or more kegs of nails, the supplier will absorb all the order
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Question 4: Take into account the answer to question 1 and the supplier’s new policy outlined in question 2 and the warehouse’s new policy in question 3. Then determine Low’s new EOQ.
The relevant table is as follows: Orders/year | Order size | Processing costs ($) | Warehousing costs ($) | Sum of processing and warehousing costs ($) | 1 | 2,000 | Free | 1,000 | 1,000 | 2 | 1,000 | Free | 500 | 500 | 3 | 667 | 90 | 334 | 424 | 4 | 500 | 120 | 250 | 370 | 5 | 400 | 150 | 200 | 350 | 6 | 334 | 180 | 167 | 347 | 7 | 286 | 210 | 143 | 353 | | | | | |
The new EOQ, based on the above information, is 334.
Question 5: Temporarily, ignore your work on questions 2, 3, and 4. Low’s luck at the race track is over; he now must borrow money to finance his inventory of nails. Looking at the situation outlined in question 1, assume that the wholesale cost of nails is $40 per keg and that Low must pay interest at the rate of 1.5% per month on the unsold inventory. What is his new EOQ?
This answer can be done in tabular form as well, with the interest on inventory appearing as a new column. If one order is placed a year, the average inventory is 1,000 kegs, worth $40,000, with annual interest charges (1.5 x 12 = 18%) of $7,200. Other interest costs are calculated in a similar fashion, adjusted for average inventory.
The relevant table is as follows:

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