Question 1

Calculate the EOQ given the following information: $$\begin{array} { | l | r | } 
\hline \text { Annulal Bales } & \$ 1,000,000 \
\hline \text { Cost per order } & \$ 45 \
\hline \text { Carrying Cost } & \$ 0.10 \
\hline
\end{array}$$

Accepted Answer

The answer of Calculate the EOQ given the following information:...

Question 2

What is the total carrying cost for an inventory of 200 widgets if the per-widget carrying cost is $4, the cost per order is $14, and there are 5 orders per year?

Accepted Answer

The total carrying cost is calculated by multiplying the per-widget carrying cost by the total number of widgets. Therefore, $4 per widget * 200 widgets = $800. However, the question specifically asks for the total carrying cost, not including the ordering cost, making the correct calculation $4 * 200 = $800. The inclusion of order cost in the explanation was incorrect as it does not contribute to the carrying cost. The carrying cost solely depends on the inventory held, thus $4 * 200 = $800 is the correct calculation for carrying cost alone.

Question 3

What is the economic order quantity for firm that sells 30,000 units annually, each unit has a $6 carrying cost, and the fixed cost of placing an order is $100?

Accepted Answer

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Question 4

ABC Corp.shows a ledger balance of $50,000 prior to writing a cheque for $5,000 and depositing $1,000 in cheques.What is the amount of their net float?

Accepted Answer

Net Float = Total Ledger Balance - (Amount of Cheques Written - Amount of Cheques Deposited)
= $50,000 - ($5,000 - $1,000)
= $50,000 - $4,000
= $46,000
Therefore, the amount of their net float is $4,000.

Question 5

How many cases of microwave popcorn are sold annually by a firm which has total annual order costs of $32,000, orders in units of 100 cases, and is charged $90 per order in addition to the $72 per case product cost?

Accepted Answer

The total annual order cost is given by the formula: Total Order Cost = (Number of Orders) x (Cost per Order). Given the total order cost is $32,000 and the cost per order is $90, we can find the number of orders: Number of Orders = $32,000 / $90 = 355.56. Since orders are in units of 100 cases, the total number of cases sold annually is 355.56 x 100 = 35,556 cases.

Question 6

What is the benefit for a firm with daily sales of $30,000 to be able to speed up collections by three days, assuming an 8 percent annual opportunity cost of funds?

Accepted Answer

The daily benefit of speeding up collections by three days would be 8% of the average daily sales of $30,000, which is $2,400. Therefore, the annual benefit would be $2,400 x 365 days = $876,000. However, since the question is asking for the benefit of speeding up collections by three days, the actual benefit would be $2,400 x 3 days = $7,200. Therefore, the best answer is B, which represents the annual benefit of speeding up collections by three days, taking into account the opportunity cost of funds.

Question 7

ABC Corp.disburses $4 million annually and keeps idle funds in Treasury bills which earn an average of 5 percent and incur a fixed cost of $35 each time a cash conversion is made.What is the average amount of cash that ABC Corp.should have on hand?

Accepted Answer

The answer of ABC Corp.disburses $4 million annually and keeps...

Question 8

A firm has estimated that it will need $3,000,000 net cash during the year.Current interest rate on money market securities is 6 percent per year and the cost of buying and selling securities cost $50 per transaction.What is the optimal transaction size of securities?

Accepted Answer

The optimal transaction size of securities can be calculated using the Baumol model, which is given by the formula: $ \sqrt{\frac{2FB}{i}} $, where F is the fixed transaction cost ($50), B is the total cash needed ($3,000,000), and i is the interest rate (6% or 0.06). Plugging in the values, we get: $ \sqrt{\frac{2*50*3,000,000}{0.06}} = \sqrt{5,000,000} = \$70,710.68 $.

Question 9

The economic order quantity for a product is 500 units.However, new orders require five working-days lead time during which time 60 units will be used.Given this information, the correct economic order quantity is:

Accepted Answer

The economic order quantity (EOQ) formula calculates the ideal order quantity a company should purchase to minimize inventory costs such as holding costs, shortage costs, and order costs. The lead time and usage rate do not affect the EOQ calculation itself; they are more relevant for determining reorder points. Therefore, the EOQ remains 500 units despite the lead time and usage rate information provided.

Question 10

Shamba Corporation writes cheques that average $90,000 and take on average 5 days to clear.Cheques are received with an average value of $45,000 and take 9 days to clear.Determine the net float.

Accepted Answer

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Question 11

What are the expected annual savings from a lock-box system that collects 150 cheques per day averaging $500 each, and reduces mailing and processing times by 2.5 and 1.5 days respectively, if the annual interest rate is 7 percent?

Accepted Answer

The lock-box system speeds up the collection process by 4 days (2.5 + 1.5). The daily collection is 150 cheques * $500 = $75,000. The annual savings from the reduced collection time is $75,000 * 4 days * 0.07 (annual interest rate) = $21,000.

Question 12

What is the opportunity cost of keeping a cash balance of $2.5 million, if the daily interest rate is 0.025 percent and the average transaction cost of investing money overnight is $50?

Accepted Answer

The opportunity cost formula is: Opportunity cost = Potential return of the best option not chosen - Return of the chosen option
If we invest the $2.5 million overnight, we can earn an interest of:
$2,500,000 x 0.025% = $625
However, there is a transaction cost of $50.

So, the potential return of the best option not chosen is $625 - $50 = $575.
Therefore, the opportunity cost of keeping a cash balance of $2.5 million is $575.
The best choice would be to invest the money overnight to earn interest, as the opportunity cost of keeping a cash balance is higher.

Question 13

What is the economic order quantity for an automobile dealer selling 2,000 cars per year, at a cost of $750 per order, and a carrying cost of $300 per automobile?

Accepted Answer

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Question 14

How much time must be saved to justify a lock-box system that processes 350 cheques per day at an average amount of $400 per cheque if the system will cost $20,000 annually and interest rates average 8 percent?

Accepted Answer

The total amount processed daily through cheques is 350 cheques * $400 = $140,000. At an 8% interest rate, the daily interest is $140,000 * 0.08 / 365 = $30.68. The annual cost of the lock-box system is $20,000, so to justify this cost, $20,000 / $30.68 ≈ 652 days of interest savings are needed. However, since the question asks how much time must be saved, and considering the daily processing, the calculation should reflect the time saved in processing these cheques faster due to the lock-box system. The correct interpretation involves dividing the annual cost by the daily interest benefit to find the number of days' worth of interest the annual fee represents, which is then converted into the time saved by faster processing. The error in the initial explanation was in misinterpreting the final step as needing 652 days of interest savings, which doesn't align with the provided options or the correct approach to answering the question. The correct approach involves understanding that the annual cost savings must equal the annual cost of the lock-box system, and the calculation should directly relate the cost savings per day to the annual cost.

Question 15

Calculate the payment float given the following information: $$\begin{array}{l}
\begin{array} { | l | l | } 
\hline\text { Data: }\
\hline \text { Company ledger balance } & 770,000 \
\hline \text { Bank' } \text { s ledger balance } & 860,000 \
\hline \text { Available balance } & 790,000 \
\hline
\end{array}
\end{array}$$

Accepted Answer

The payment float is calculated as the difference between the company's ledger balance and the bank's ledger balance: $860,000 - $770,000 = $90,000.

Question 16

What are the minimum total costs of carrying and ordering inventory for a firm that sells 1,500 units with a carrying cost of $2 per unit and places orders in lots of 100?

Accepted Answer

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Question 17

Fast Bucks Inc.has offered to set up a concentration banking system that will save three days of mail float and one day of presentation float.Your receivables average $20,000 per day and the opportunity cost of funds is 6 percent.How much would you be willing to pay Fast Bucks annually to administer the system perpetually?

Accepted Answer

The annual savings from the concentration banking system would be 4 days x $20,000 x 6% = $4,800. Therefore, the maximum amount that the company should be willing to pay annually for the system is $4,800. Choice A ($2,400) is too low and would not provide a sufficient return on investment. Choice C ($40,000) and choice D ($80,000) are both too high and would eliminate the cost savings benefit of implementing the system. Therefore, the best choice is B ($4,800).

Question 18

Calculate EOQ given the following information: $$\begin{array} { | l | r | } 
\hline \text { Annulal Bales } & \$ 750,000 \
\hline \text { Cost per order } & \$ 60 \
\hline \text { Carrying Cost } & \$ 0.10 \
\hline
\end{array}$$

Accepted Answer

The EOQ (Economic Order Quantity) formula is $\sqrt{\frac{2DS}{H}}$, where D is the demand (750,000 units), S is the ordering cost ($60), and H is the carrying cost per unit ($0.10). Plugging in the values, EOQ = $\sqrt{\frac{2 \times 750,000 \times 60}{0.10}} = 30,000$ units.

Question 19

What is the average inventory level, based on EOQ, for a firm that has annual sales of 2,500 units, costs per order of $45, and carrying costs of $5 per unit?

Accepted Answer

EOQ formula is:

EOQ = sqrt((2DS)/(H))

Where, 
D = Annual demand
S = Cost per order
H = Annual carrying cost per unit

Plugging in the values, 
EOQ = sqrt((2*2500*45)/5) = 106.07

Therefore, the average inventory level is 106.

Question 20

Find the break-even size of wire transfer if the cost of wire transfer is $20, the daily interest rate is 0.02 percent and the reduction in float is three days.

Accepted Answer

The break-even size of a wire transfer can be calculated using the following formula:

Break-even size = Cost of wire transfer / (Daily interest rate x Reduction in float)

Plugging in the given values, we get:

Break-even size = $20 / (0.02% x 3) 
                = $20 / (0.0006)
                = $33,333.33

Therefore, any wire transfer size above $33,333.33 would result in a net gain for the company, while any transfer size below would result in a net loss. Choice (C) is the only option that matches this break-even calculation.

Quiz 21: Cash and Inventory Management

Calculate the EOQ given the following information: $\begin{array} { | l | r | } \hline \text { Annulal Bales } & \$ 1,000,000 \\\hline \text { Cost per order } & \$ 45 \\\hline \text { Carrying Cost } & \$ 0.10 \\\hline\end{array}$