Exam 28: Advanced Issues in Cash Management and Inventory Control

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.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?

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

Exhibit Palmer Pens 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 Palmer Pens.What is the firm's EOQ?

Exhibit Palmer Pens 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 Palmer Pens.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 just-in-time system is designed to stretch accounts payable as long as possible.

The easier a firm's access to borrowed funds the higher its precautionary balances will be, in order to protect against sudden increases in interest rates.

Exhibit Palmer Pens 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 Palmer Pens.What is Palmer's minimum costs of ordering and holding inventory?

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

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 is the optimal transaction size for transfers from marketable securities to cash?

During times of inflation, which of these inventory accounting methods is best for cash flow?

Which of the following is true of the Baumol model? Note that the optimal cash transfer amount is C*.

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.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?

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, and the total cash needed for transactions annually is $960,000.On what opportunity cost of holding cash was this analysis based?

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.What will be the total cost to Duckett of maintaining the optimal average cash balance, as determined by the Baumol model?

Halliday Inc.receives a $2 million payment once a year.Of this amount, $700,000 is needed for cash payments made during the next year.Each time Halliday deposits money in its account, a charge of $2.00 is assessed to cover clerical costs.If Halliday can hold marketable securities that yield 5 percent, and then convert these securities to cash at a cost of only the $2 deposit charge, what is the total cost for one year of holding the minimum cost cash balance according to the Baumol model?

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

Suppose Stanley's Office Supply purchases 50,000 boxes of pens every year.Ordering costs are $100 per order and carrying costs are $0.40 per box.Moreover, management has determined that the EOQ is 5,000 boxes.The vendor now offers a quantity discount of $0.20 per box if the company buys pens in order sizes of 10,000 boxes.Determine the before-tax benefit or loss of accepting the quantity discount.(Assume the carrying cost remains at $0.40 per box whether or not the discount is taken.)

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

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.If Cartwright holds a safety stock equal to a 30-day supply of chips, what is Cartwright's minimum cost of ordering and carrying inventory?