The Timberline firm expects a total cash need of $12,500 over the next 3 months. They have a beginning cash balance of $1,500,and cash is replenished when it hits zero. The fixed cost of selling securities to replenish cash balances is $3.50. The interest rate on marketable securities is 8% per annum. There is a constant rate of cash disbursement and no cash receipts during the month. What is the total fixed order cost for the next three months based on the firm's current practice?

Question

Quizplus · Accepted Answer

The total fixed order cost for the next three months is $29.17. This is calculated as follows:Total cash need = $12,500Beginning cash balance = $1,500Cash replenished when it hits zeroFixed cost of selling securities to replenish cash balances = $3.50Interest rate on marketable securities = 8% per annumConstant rate of cash disbursement and no cash receipts during the monthNumber of times cash is replenished = Total cash need / (Beginning cash balance + Fixed cost of selling securities to replenish cash balances)= $12,500 / ($1,500 + $3.50)= 8.33 timesTotal fixed order cost = Number of times cash is replenished * Fixed cost of selling securities to replenish cash balances= 8.33 * $3.50= $29.17

The Timberline Firm Expects a Total Cash Need of $12,500