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Exam 28: Advanced Issues in Cash Management and Inventory Control

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Question 21

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Which of the following is true of the EOQ model? Note that the optimal order quantity, Q, will be called EOQ.

A) If the annual sales, in units, increases by 20%, then EOQ will increase by 20%.
B) If the average inventory increases by 20%, then the total carrying costs will increase by 20%.
C) If the average inventory increases by 20% the total order costs will increase by 20%.
D) The EOC is the same for all companies.
E) If the fixed per order cost increases by 20%, then EOQ will increase by 20%.

F) A) and E)
G) B) and C)

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Question 22

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Gemini Inc.'s optimal cash transfer amount, using the Baumol model, is $60,000.The firm's fixed cost per cash transfer of marketable securities to cash is $180.In addition, the total estimated cash costs (transfers and carrying cost) for the firm, based on 16 transactions per year, are $5,760.On what opportunity cost of holding cash was this analysis based?

A) 19.2%
B) 10.4%
C) 6.3%
D) 12.1%
E) 9.6%

F) B) and E)
G) B) and D)

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Question 23

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Each year, Holly's Best Salad Dressing, Inc.(HBSD) purchases 50,000 gallons of extra virgin olive oil.Ordering costs are $100 per order, and the carrying cost, as a percentage of inventory value, is 80 percent.The purchase price to HBSD is $0.50 per gallon.Management currently orders the EOQ each time an order is placed.No safety stock is carried.The supplier is now offering a quantity discount of $0.03 per gallon if HBSD orders 10,000 gallons at a time.Should HBSD take the discount?

The cash balances of most firms consist of transactions, compensating, precautionary, and speculative balances.We can produce a total desired cash balance by calculating the amount needed for each purpose and then summing them together.

If a company increases its safety stock, then its average inventory will go up.

Exhibit Cartwright Computing Cartwright Computing expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate.Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying costs is equal to 20 percent of the purchase price.(Assume a 360-day year.) -Refer to Exhibit Cartwright Computing.What is the economic ordering quantity for chips?

For some firms, holding highly liquid marketable securities is a substitute for holding cash because a marketable securities portfolio can accomplish the same objective as cash.

Exhibit Cartwright Computing Cartwright Computing expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate.Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying costs is equal to 20 percent of the purchase price.(Assume a 360-day year.) -Refer to Exhibit Cartwright Computing.How many orders should Cartwright place during the year?

Exhibit Duckett Group The Duckett Group is trying to determine its optimal average cash balance.The firm has determined that it will need $5,000,000 net new cash during the coming year.The fixed transaction cost of converting securities to cash is $50, and the firm earns 10 percent on its marketable securities investments. -Refer to Exhibit Duckett Group.According to the Baumol model, what should be Duckett's average cash balance?