Financial

management
Assignment
Submitted by Betselot Yigezu
IDNO 0165/11
Section c
1. ZEBRA enterprises wishes to determine the economic order quantity (EOQ) for
a critical
and expensive inventory item that is used in large amounts at a relatively
constant rate throughout the year. The firm uses 450,000 units of the item
annually, has order costs of
$375 per order, and its carrying costs associated with this item are $28 per unit
per year.
Required:

A) Calculate the firm’s EOQ.

B) Total carrying cost
C) Total ordering cost
D) What is the firm’s total cost based upon the EOQ calculated in
requirement A?
E) What is the firm’s reorder point?

Answer

2 xSxO 2 x 450000 x 375

A , EOQ=
√ c
=
√ 28

=3471.825
EOQ 3471.825
B, total carrying cost=C x 2 =28x 2

=48605.55
S 450000
C, total ordering cost= Ox EOQ =¿375x 3471.825

=48605.56

D, total cost= ordering cost+ carrying cost

=48605.56+48605.55=97211.11
 E, there is no given to calculate the reorder point

2. The firm plans to hold safety stock of the item equal to 5 days of usage, and it
estimates
that it takes 12 days to receive an order of the item once placed. Assume a 365-
day in a year.
A) What is the firm’s reorder point?

Answer

Load time(in days)=12

Daily of usage= 450000/365=1232

Reorder point = (load time x daily usage )+ safety stock

= (12x1232) + (5x1232)=20944

3. Given the following information, calculate the target cash balance using the
Baumol model (4 Points).
Annual interest rate
-----------------------------------------------------------------------------12%

Fixed order cost

--------------------------------------------------------------------------------$100

Total cash needed

-------------------------------------------------------------------------$240,000

i. Calculate the target cash balance?

ii. Calculate the opportunity cost of holding cash?
iii. Calculate the conversion cost, and the total cost?
iv. What would be the opportunity, conversion and total cost if target cash
balance $15,000 were held instead?
Answer
2 x 100 x 240000
EOQ=
√ 0.12
=20000

1 Average cash= EOQ/2= 20000/2=10000

2 holding cost= 10000x0.12= 1200
demand for cost
3 #of conversion= EOQ
= 240000/20000=12

Conversion cost= 12x100= 1200

Total cost= tot conversion cost + holding cost
=1200+1200=2400
4 average cash= 15000/2= 7500A
Holding cost=7500x0.12=900
demand of cost
# of conversion= EOQ
= 240000/15000=16

Conversion cost= 16x100=1600

Total cost= holding cost + transaction cost
=1600+900=2500