Question

Arbor insulators uses sawdust as a raw material. Bay City saw mills supplies them the sawdust at $ 12 per cwt (One cwt = 100 lbs). Bay City offers to sell sawdust to Arbor at $ 6 per cwt if Arbor orders in quantities of 1100 cwt per order. Arbor's fixed order quantity has been 660 cwt in the past, but because of purchase economies decides to switch to 1100 cwt orders. According to the EOQ model, what is the likely effect on their carrying costs (assuming yearly demand remains the same)

a Total yearly carrying costs will increase
b. Total yearly carrying costs will decrease
c. None of the listed
d. Total yearly carrying costs will remain the same

Answer 1

According to the EOQ model, when Arbor Insulators increases their order quantity of raw material sawdust from 660 cwt to 1100 cwt, their total yearly carrying costs will likely increase.

Step-by-step explanation:

The student is asking about the effect on carrying costs using the Economic Order Quantity (EOQ) model when a company increases its order quantity for a raw material. When Arbor Insulators increases its order quantity from 660 cwt to 1100 cwt, even though the cost per cwt from Bay City saw mills has decreased, the total quantity of material on hand will increase. This generally leads to higher carrying costs because the company must store and manage more inventory. Therefore, Arbor's total yearly carrying costs will likely increase since more capital is tied up in inventory, assuming yearly demand remains the same and other factors such as storage costs remain constant.