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Although some view the EOQ as an outdated technique, others suggest that the EOQ allows "senior management to determine the money required to finance...

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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Although some view the EOQ as an outdated technique, others suggest that the EOQ allows “senior management to determine the money required to finance inventories, the length of time those funds are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
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C= carrying costs of the inventory (expressed as an annual percentage of the inventory’s dollar value) I= dollar value of the inventory, per unit Thus: Assignment After making some wise short-term investments at a race track, Chris Low had some additional cash to  invest in a business. The most promising opportunity at the time was in building supplies, so Low bought  a business that specialized in sales of one size of nail. The annual volume of nails was 2,000 kegs, and  they were sold to retail customers in an even flow. Low was uncertain of how many nails to order at any  time. Initially, only two costs concerned him: order-processing costs, which were $60 per order without  regard to size, and warehousing costs, which were $1 per year per keg space. This meant that Low had to  rent a constant amount of warehouse space for the year, and it had to be large enough to accommodate  an entire order when it arrived. Low was not worried about maintaining safety stocks, mainly because the  outward flow of goods was so even. Low bought his nails on a delivered basis. Deliverables This week’s lab consists of six questions. Please be certain that you answer all of the questions and  address all of the areas outlined in the grading rubric below. L A B  S T E P S  Step 1: Initial EOQ Question 1:  Using the EOQ methods outlined in Chapter 9, determine how many kegs of nails Low  should order at one time. Step 2: Low-Quantity Discount 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.) Step 3: Low Rent 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 that Low will have in stock, rather than on the  maximum number of kegs that Low would need room for whenever a new shipment arrived. The storage  charge per keg remains the same. Does this change the answer to Question 1? If so, what is the new  answer?
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