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Exam 28: Advanced Issues in Cash Management and Inventory Control

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Question 21

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Exhibit 28.3 Assume that Palmer Executive Pens uses 1,440,000 gallons of ink each year. Further, assume that Palmer can order the ink at a cost of $2 per gallon plus fixed ordering costs of $100 per order. The firm's carrying cost is 20 percent of the inventory value, at cost. -Refer to Exhibit 28.3.Now,suppose the manufacturer offers a discount of 0.5 percent for orders of a least 40,000 gallons.Should Palmer increase its ordering quantity to take the discount?

A) Yes;it will save $827 if it takes the discount.
B) No;it will lose $827 if it takes the discount.
C) Yes;it will save $14,400 if it takes the discount.
D) Yes;it will save $13,573 if it takes the discount.
E) No;it will lose $13,573 if it takes the discount.

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

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Question 22

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Exhibit 28.2 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 28.2.If the lead time for placing an order is 5 days,and Cartwright holds a safety stock equal to a 30-day supply of chips,then at what inventory level should an order be placed?

A) 15,570
B) 3,175
C) 12,250
D) 13,675
E) 8,124

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

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Question 23

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New England Charm,Inc.specializes in selling scented candles.The company has established a policy of reordering inventory every 30 days.A recently employed MBA has considered New England's inventory problem from the EOQ model viewpoint.If the following constitute the relevant data,how does the current policy compare with the optimal policy? Ordering cost = $10 per order Carrying cost = 20% of purchase price Purchase price = $10 per unit Total sales for year = 1,000 units Safety stock = 0

Humphrey's Housing has been practicing cash management for some time by using the Baumol model for determining cash balances.Some time ago,the model called for an average balance (C*/2) of $500;at that time,the rate on marketable securities was 4 percent.A rapid increase in interest rates has driven the interest rate up to 9 percent.What is the appropriate average cash balance now?

Exhibit 28.2 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 28.2.If Cartwright holds a safety stock equal to a 30-day supply of chips,what is its average inventory level?

Which of the following would cause average inventory holdings to decrease,other things held constant?

Exhibit 28.1 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 28.1.According to the Baumol model,what should be Duckett's average cash balance?

Exhibit 28.2 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 28.2.Assume that Cartwright holds a safety stock equal to a 30-day supply of chips.What is the maximum amount of inventory that will have on hand at any time,that is,what will be the inventory level right after a delivery is made?

Exhibit 28.3 Assume that Palmer Executive Pens uses 1,440,000 gallons of ink each year. Further, assume that Palmer can order the ink at a cost of $2 per gallon plus fixed ordering costs of $100 per order. The firm's carrying cost is 20 percent of the inventory value, at cost. -Refer to Exhibit 28.3.What is the firm's EOQ?