BSOP 434 WEEK 1 LAB ASSIGNMENT
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BSOP 434 WEEK 1 LAB ASSIGNMENT
Lab Assignment:
1. 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. On
average, the rented warehouse space is only half full. 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.
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?
Step 4: New EOQ
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.
Step 5: Financing Inventory
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 unsold inventory. What is his new EOQ?
Step 6: Final EOQ
Question 6: Taking into account all of the factors listed in
Questions 1, 2, 3, and 5, calculate Low’s EOQ for kegs of nails.
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