View the step-by-step solution to:

# Although some view the EOQ as an outdated technique, others suggest that the EOQ allows "senior management to determine the money required to finance...

Question # 2 : Assume that 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 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.)

Although some view the EOQ as an outdated technique, others suggest that the EOQ allows “senior management to determine the money required to finance inventories, the length of time those funds are required, the source of that finance and the impact of its cost on the firm’s profitability.” 5 The EOQ determines the point at which the sum of carrying costs and ordering costs is minimized, or the point at which carrying costs equal ordering costs (see Figure 9-2 ). Assuming that carrying costs and ordering costs are accurate, the EOQ “is absolutely the most cost-effective quantity to order based on current operational costs.” 6 Mathematically, the EOQ can be calculated in two ways; one presents the answer in dollars, the other in units. In terms of dollars, suppose that \$1,000 of a particular item is used each year, the order costs are \$25 per order submitted, and inventory carrying costs are 20 percent. The EOQ can be calculated using this formula: Where EOQ= the most economic order size, in dollars A= annual usage, in dollars B= administrative costs per order of placing the order C= carrying costs of the inventory (expressed as an annual percentage of the inventory dollar value) Thus: Alternatively, the EOQ can be calculated in terms of the number of units that should be ordered. Using the same information as in the previous example, and assuming that the product has a cost of \$5 per unit, the relevant formula is: Where EOQ= the most economic order size, in units D= annual demand, in units (200 units; \$1,000 value of inventory/\$5 value per unit) B= administrative costs per order of placing the order
Show entire document

Dear Student, I have reviewed your assignment thoroughly, based on your assignment details and current... View the full answer

### Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

### -

Educational Resources
• ### -

Study Documents

Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

Browse Documents