Business Logistics 4
- Introduction
The company in focus is called Low Nail Company. The company specialized in one size of nail and was bought by Chris Low from outstanding funds he was left with after making wise short term investments in a race track. The company has a demand that is fairly constant as its annual demand of nails is set at 2000 kegs. The company deals in one type of product. The task is to determine the economic order quantity at different assumptions. Economic order quantity is the quantity level that a company can hold which minimizes the variable costs of managing the inventory. Variable costs in this case refer to order processing costs and order handling costs (Jones, 1991).
For Economic Order Quantity (EOQ) to be determined the following assumptions must be achieved. First the company must be dealing with one product only. In the case of Low Nail Company this assumption holds since it is dealing with one size of nail only. The other assumption is that demand must be uniform continuous over time and also uniform. The demand for the nails is stated as being even and assured. The cost of placing the order must be separate and independent of the size of the order. There is no lead time and the cost of holding an order is not depended on the quantity of the order (Ren, 2010).
- A thesis statement
Economic order quantity is important in maintaining order processing and handling costs at the minimum. At economic order quantity level order processing costs and order handling costs are equal.
b. Purpose of paper
The purpose of the paper is to determine the economic order quantity at different quantities of nails in kilograms that Low Order Company can hold to maintain variable costs of order processing and handling at the lowest. The paper also determines the economic order quantity when the order processing costs are paid by the supplier either in full or in half.
c.) Overview of paper
The paper begins by determining the economic order level (EOQ) when the annual volume of nails was 2000kegs, the order processing costs was $60 and the handling/warehousing costs were $ 1 per keg per year. The paper next determines the economic order quantity after terms are agreed with the supplier in which he agrees to give a discount by absorbing order processing costs in full for orders equal to or above 750 kegs. The paper also determines the Economic Order Quantity when the supplier agreed to give a discount of half of the order processing costs when the company orders 249kegs and 749 kegs. Lastly the paper determines the economic order quantity when the company‘s conditions have changed and the whole sale cost is $40 per keg and the company is to pay 1.5 percent per month for unsold stock.
2. Body
- a) Economic order quantity (EOQ) is defined as the order quantity of inventory that minimizes the total costs of managing inventory. The main costs of managing inventory include holding costs and ordering costs. To determine the economic order quantity of Low Nail Company we must make the following assumptions. First is that the rate of demand for the nails is known and spread evenly throughout the year, and secondly, each order is delivered in full when the nails run out of stock. Further it is assumed that ordering costs and holding costs are fixed for each order placed and that only one product is involved (Tanel, 2012).
The economic order quantity for Low Nail Company is obtained through the following formula;
EOQ = SQRT (2 × Quantity × Cost Per Order / Carrying Cost Per Order)
Whereby;
EOQ-The economic order quantity
SQRT=Square root
(Tanel, 2012)
Hence;
Quantity=2000 kegs
Cost per order=$60 per order
Carrying cost per order=$1
The Economic order quantity (EOQ) = 2*2000*$60 = 489.9kegs
$1
The Economic order quantity (EOQ) =489.9 kegs
- b) Determining the economic order quantity after terms are agreed with the supplier in which he agrees to give a discount by absorbing order processing costs in full for orders equal to or above 750 kegs. and the Economic Order Quantity when the supplier agreed to give a discount of half of the order processing costs when the company orders 249kegs and 749 kegs
| Order | Order processing costs | Handling costs | Economic order quantity (EOQ) |
| 750 Kegs | 0 | $1 | 38.7 kegs |
| 749 Kegs | $30 | $1 | 212 kegs |
| 249 Kegs | $30 | $1 | 122.22 kegs |
- The Economic Order Quantity (EOQ) when Low Nail Company places order is a minimum of 750 kegs and whereby the supplier absorbs full order-processing costs will be as calculated below;
EOQ = SQRT (2 × Quantity × Cost Per Order / Carrying Cost Per Order)
Whereby;
EOQ-The economic order quantity
SQRT=Square root
Hence;
Quantity=750 kegs
Cost per order= nil per order
Carrying cost per order=$1
The Economic order quantity (EOQ) = 2*750 = 38.7 kegs
$1
The Economic order quantity (EOQ) =38.7 kegs
- The Economic Order Quantity (EOQ) when Low Nail Company places order is a minimum of 749 kegs and whereby the supplier absorbs half of the order-processing costs in which case it will be $ 30 (1/2 of $60) will be as calculated below;
EOQ = SQRT (2 × Quantity × Cost Per Order / Carrying Cost Per Order)
Whereby;
EOQ-The economic order quantity
SQRT=Square root
Hence;
Quantity=749 kegs
Cost per order= $30 per order
Carrying cost per order=$1
The Economic order quantity (EOQ) = 2*749*$30 = 212 kegs
$1
The Economic order quantity (EOQ) =212 kegs
- The Economic Order Quantity (EOQ) when Low Nail Company places order is a minimum of 249 kegs and whereby the supplier absorbs half of the order-processing costs in which case it will be $ 30 (1/2 of $60) will be as calculated below;
EOQ = SQRT (2 × Quantity × Cost Per Order / Carrying Cost Per Order)
Whereby;
EOQ-The economic order quantity
SQRT=Square root
Hence;
Quantity=749 kegs
Cost per order= $30 per order
Carrying cost per order=$1
The Economic order quantity (EOQ) = 2*249*$30 = 122.22 kegs
$1
The Economic order quantity (EOQ) =122.22 kegs
- c) According to situation in question a) above the economic order quantity (EOQ) is determined to be 489.9 kegs. The cost per order is set at $40 per kg and Low Nails Company is set to pay an interest of 1.5 percent per month. To determine the new economic order quantity we use the following formula;
EOQ = SQRT (2 × Quantity × Cost Per Order / Carrying Cost Per Order)
Whereby;
EOQ-The economic order quantity
SQRT=Square root
Hence;
Quantity=489.9 kegs
Cost per order= $40 per order
Carrying cost per order=1.5%
The Economic order quantity (EOQ) = 2*489.9*$40 = 161.6 kegs
1.5
The Economic order quantity (EOQ) =161.6 kegs
Conclusion – Summary of main points
In conclusion, economic order quantity model is a model which determines the order quantity level of inventory that minimizes the total cost of managing inventory in a company. For the model to hold several assumptions must be maintained. Demand must be constant, even and Continous.The Company must be dealing in one product only. The next assumption is that the cost of processing an order must be independent of the size of the order. The quantity of stock does not determine the cost of handling stock. Lastly the same quantity of stock is ordered and there is no lead time (Appadoo, Bector & Bhatt, 2012).
References
Appadoo, S. S., Bector, C. R., & Bhatt, S. K. (2012). Fuzzy EOQ model using possibilistic approach. Journal of Advances in Management Research, 9(1), 139-164. doi:http://dx.doi.org/10.1108/09727981211225707
Jones, D. J. (1991). JIT & the EOQ model: Odd couple no more!Management Accounting, 72(8),
- Retrieved from http://search.proquest.com/docview/229794128?accountid=45049
Ren, L. (2010). The robustness of the basic EOQ. The International Business & Economics Research Journal, 9(12), 17-22. Retrieved from http://search.proquest.com/docview/840551811?accountid=45049
Tanel, T. L. (2012). How to make EOQ relevant again. SDCExec.Com, Retrieved from http://search.proquest.com/docview/1422206871?accountid=45049
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