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 …show more content…

Question 6: Taking into account all the factors listed in questions 1, 2, 3, and 5, calculate Low’s EOQ for kegs of nails.
The relevant table is as follows:

Orders/year | Order size | Processing costs ($) | Warehousing costs ($) | Interest costs ($) | Sum of processing, warehousing, and interest costs ($) | 1 | 2,000 | Free | 1,000 | 7,200 | 8,200 | 2 | 1,000 | Free | 500 | 3,600 | 4,100 | 3 | 667 | 90 | 334 | 2,405 | 2,829 | 4 | 500 | 120 | 250 | 1,800 | 2,170 | 5 | 400 | 150 | 200 | 1,440 | 1,790 | 6 | 334 | 180 | 167 | 1,203 | 1,550 | 7 | 286 | 210 | 143 | 1,030 | 1,383 | 8 | 250 | 240 | 125 | 900 | 1,265 | 9 | 223 | 540 | 112 | 807 | 1,459 |
The new answer, based on the above information, is 250