KUMAR NAIL COMPANY

After taking some wise movie roles, Akshay Kumar had some additional cash to invest in a business. The most promising opportunity at the time was in building supplies, so Akshay Kumar bought a business that specialized in sales of one size of nail. The annual volume of nails was 10,000 kegs and they were sold to retail customers in an even flow. Kumar was uncertain how many nails to order at any time. Initially, only two costs concerned him: Order processing costs, which were $60/order without regard to size and warehousing costs, which were $1 per year per keg space. This meant that Akshay Kumar had to rent a constant amount of warehouse space for the year, and it had to be large enough to accommodate the entire order when it arrived. Kumar was not worried about maintaining safety stocks, mainly because the outward flow of goods was so even. Kumar bought his nails on a delivered basis.

Question 1: Using the EOQ methods outlined in the text, how many kegs of nails should Kumar order at one time?

Question 2: Assume all conditions in Question 1 hold, except that Kumars supplier now offers a quantity discount in the form of absorbing all or part of Kumars order-processing costs. For orders of 7500 or more kegs of nails, the supplier will absorb all the order-processing costs; for orders between 4999 and 7499 kegs, the supplier will absorb half. What is Kumars new EOQ? (It might be useful to lay out all costs in tabular form for this and later questions.)

Orders per Year	Order Size	Processing Costs ($)	Warehousing Costs ($)	Sum of Processing and Warehousing Costs ($)

Question 3: Temporarily, ignore your work on Question 2. Assume that Kumars warehouse offers to rent Kumar space on the basis of the average number of kegs Kumar will have in stock, rather than on the maximum number of kegs Kumar 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?

Question 4: Take into account the answer to Question 1 and the suppliers new policy outlined in Question 2 and the warehouses new policy in Question 3. Then determine Kumars new EOQ.

Question 5: Temporarily, ignore your work on Questions 2, 3, and 4. Kumars luck at the movies 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 Kumar must pay interest at the rate of 1.5 percent per month on unsold inventory. What is his new EOQ?

Question 6: Taking into account all the factors listed in Questions 1, 2, 3, and 5, calculate Kumars EOQ for kegs of nails.