Problem 1

In the second year, Howe Corporation finds it can reduce ordering

cost to $1 per order but carrying costs will stay the same at
$1.008 per unit.
A)
a).EOQ=
=

2 Anticipates sales Ordering Costs

Carrying cost per unit
2 $ 126,000 $ 1
$ 1.008

=500
b).How many orders/year=
c).Average Inventory=

Anticipates
$ 126,000
=
=252
EOQ
500

EOQ
500
=
2
2 =250

d).Total Carrying Cost=Average Inventory Carrying Cost

per Unit=250 $1.008=$252
Total Ordering Cost=Order Times per Year Ordering
Cost per Order=252 $1=$252
Total Cost of Inventory= Total Carrying Cost+ Total
Ordering Cost=$504
B) As the Ordering Cost reduce from $4 per unit to $1 per unit,
the EOQ become half of the first year, so do the Average
Inventory and Total Cost. The times of order per year
become double.

Problem 2
Higgins Athletic Wear has expected sales of $22,500 units a
year, Carrying costs of $1.50 per unit, and an ordering cost of
$3 per order.

a.What is the economic order quantity

b.What will be the average inventory? The total carrying cost?
c.Assume an additional 30 units of inventory will be required as
safety stock. What is the new average inventory be? What will
be the new total carrying cost be?
A). EOQ=
=

2 Anticipates sales Ordering Costs

Carrying cost per unit
2 $ 22,500 $ 3
$ 1.50

=300
B). Average Inventory=

EOQ
300
= 2 =150
2

Total Carrying Cost=Average Inventory Carrying Cost per

Unit=150 $1.50=$225
C). Average Inventory=

EOQ
+Safety stocks=150+30=180
2

Total Carrying Cost=Average Inventory Carrying Cost per

Unit=180 $1.50=$270
Problem 3
Assuming ABC Company k f =4%, k M =11%, =1.8
a). k y
b).Find out the Market Risk premium
a). k y = k f + ( k M - k f ) =4%+1.8(11%-4%) =4%+1.8
7%=16.6%
b).Market Risk Premium= k M - k f =11%-4%=7%