GROUP 1

JINGCO, John Ryan

KATADA, Mark Raven
MANABAT, Ian Rovanne
TAN, Yendrick

Problem A. Luster Corporation presents the following data: Usage is 400 units per month, cost
per order is $20, and carrying cost per unit is $6.
Given these data, answer the following questions:

Usage rate: 400 units per month

Cost per order: $20
Carrying cost per unit $6.

1. What is the economic order quantity?

Annual Demand (D) = 400 x 12 = 4800
Ordering Cost = $20
Carrying Cost = $6
2 𝑥 𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑚𝑎𝑛𝑑 𝑥 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑂𝑟𝑑𝑒𝑟 (2)(4800)(20)
𝐸𝑂𝑄 = 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐶𝑜𝑠𝑡
= 6
= 179 units
2. How many orders are required each month?
400 𝑢𝑛𝑖𝑡𝑠
179 𝑢𝑛𝑖𝑡𝑠
= 2.23 orders
3. How often should each order be placed?
360
4800 𝑢𝑛𝑖𝑡𝑠
𝑥 179= 13.425 days

Problem C. Data products, Inc., uses 2,400 units of a product per year on a continuous basis.
The product carrying costs are P60 per year and ordering costs are P250 per order. It takes 20
days to receive a shipment after an order is placed and the firm requires a safety stock of 8
days of usage in inventory
5. Calculate the economic order quantity
2 𝑥 𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑚𝑎𝑛𝑑 𝑥 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑂𝑟𝑑𝑒𝑟 (2)(2,400)(250)
𝐸𝑂𝑄 = 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐶𝑜𝑠𝑡
= 60
=142
6. What is the ordering cost?
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑚𝑎𝑛𝑑 𝑥 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑂𝑟𝑑𝑒𝑟 2400
Ordering cost = ( 𝑂𝑟𝑑𝑒𝑟 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦
) = ( 142
)(250)=$4,225.35
7. What is the holding cost?
𝑂𝑟𝑑𝑒𝑟 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑥 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 142
Holding Cost = ( 2
)=( 2
)(60)=$4,260
8. The supplier has notified the company that if they increase their order quantity by 58
units they will give the company a discount. Calculate the dollar discount that the
company will have to give Dataproducts to result in a net benefit to the company.
2400 142
Total cost = ( 142+58 )(250) + ( 2
)(60)= $9,000
Dollar Discount will be = $9,000 - $8,485 = $515
Problem D.
9. What is the economic order quantity for the following inventory policy: A firm sells
32,000 bags of premium sugar per year. The cost per order is P200 and the firm
experiences a carrying cost of P0.80 per bag.
2 𝑥 𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑚𝑎𝑛𝑑 𝑥 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑂𝑟𝑑𝑒𝑟 (2)(32,000)(200)
𝐸𝑂𝑄 = 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐶𝑜𝑠𝑡
= 0.8
= 4,000 bags
Problem I. Prestige Bank will give a company a 1-year loan at an interest rate of 20 percent
payable at maturity, while Heritage Bank will lend on a discount basis at a 19 percent interest
rate.
14. Which bank charges the lowest effective rate?

Prestige Bank:
0.2
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 = 1−0.2
= 25%
Heritage Bank:
0.19
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 = 1−0.19
= 23.46%

Heritage Bank has the lowest effective rate of 23.46%

Problem J. A&A Company purchased a new machine on October 20th, 2003 for $1,000,000 on
credit. The supplier has offered A&A terms of 2/10, net 45. The current interest rate the bank is
offering is 16 percent.
15. Compute the cost of giving up a cash discount.
0.02 360
Using 2/10 net 45, = ( (1−0.02) )( 45−10 )= 21%
16. Should the firm take or give up the cash discount?

The firm should take a cash discount since the cost of the foregoing cash
discount is greater than the bank’s interest rate

17. What is the effective rate of interest if the firm decides to take the cash discount by
borrowing money on a discount basis?

35
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 1, 000, 000 𝑥 0. 16 𝑥 360
= $15,555.56
15,555.56 360
Effective Interest Rate = 1,000,000 − 15,555.56
𝑥 35 = 16.25%

Problem K. Mime Theatrical Supply is in the process of negotiating a line of credit with two local
banks. The prime rate is currently 8%. The terms are as follows:

Bank Loan Terms

Bank of Mendiola 1 percent above prime rate on a discounted basis and a 20

percent compensating balance on the face value of the loan
 Bank of Recto 2 percent above prime rate and a 15 percent compensating
balance
18. Calculate the effective interest rate of both banks

For Bank of Mendiola, the effective interest rate is:

𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 = 𝑃𝑟𝑖𝑚𝑒 𝑅𝑎𝑡𝑒 + 1% + 20% 𝑐𝑜𝑚𝑝𝑒𝑛𝑠𝑎𝑡𝑖𝑛𝑔 𝑏𝑎𝑙𝑎𝑛𝑐𝑒
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 = 8% + 1% + 20% = 29%
For Bank of Recto, the effective interest rate is:
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 = 𝑃𝑟𝑖𝑚𝑒 𝑅𝑎𝑡𝑒 + 2% + 15% 𝑐𝑜𝑚𝑝𝑒𝑛𝑠𝑎𝑡𝑖𝑛𝑔 𝑏𝑎𝑙𝑎𝑛𝑐𝑒
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 = 8% + 2% + 15% = 25%

19. Recommend which bank’s line of credit the company should accept?

Mime Theatrical Supply should accept Bank of Recto’s line of credit since it’s 4%
lower than Bank of Mendiola.

Problem L. Promotor Bilis Delivery Service is analyzing the credit terms of each of three
suppliers, A, B, and C.

Supplier Credit Terms

A 1/15 net 40

B 2/10 net 30

C 2/15 net 35
20. Determine the approximate cost of giving up the cash discount.

For A:
0.01 360
(1−0.01)
𝑥 25
= 14.55%
For B:
0.02 360
(1−0.02)
𝑥 20
= 36.73%
For C:
0.02 360
(1−0.02)
𝑥 20
= 36.73%

21. Assuming the firm needs short-term financing, recommend whether or not the firm
should give up the cash discount or borrow from the bank at 10 percent annual interest.
Evaluate each supplier separately

Promotor Bilis Delivery Service should give up Supplier A since it has the lowest
cost of giving up discount.