The following inventory data have been established for Company A:
(1) Orders must be placed in multiples of 100 units.
(2) Annual sales are 338,000 units.
(3) The purchase price per unit is $6.
(4) Carrying costs are 20 percent of the purchase price of goods.
(5) The fixed order cost is $48.
(6) Three days are required for delivery of orders.
Answer the following questions:
a. How many orders should Company A place each year?
b. At what inventory level should an order be made?
c. Calculate the total cost of ordering and carrying inventories if the order quantity is (1) 4,000 units, (2) 4,800 units, and (3) 6,000 units. (4) What are the total costs if the order quantity is the EOQ?
You are hired as a finance expert, to help Mr. Simpson his store's cash management. Mr. Simpson is very eager to learn, so he has asked you to develop a set of questions to help him understand cash management. Answer the following questions:
a. What are some specific advantages for a company in holding adequate cash balances?
b. How can a company synchronize its cash flows, and what good would this effort do?
c. You have been going through the company's checkbook and bank balances. In the process, you discovered that Company A, on average, writes checks in the amount of $10,000 each day and that it takes approximately five days for these checks to clear. Also, the Company receives checks in the amount of $10,000 daily, but loses four days while they are being deposited and cleared. What is the firm's disbursement float, collections float, and net float?
d. How can a company speed up collections and slow down disbursement?
e. Why would a company hold marketable securities?
f. What factors should a company consider in building its marketable securities portfolio? What are some securities that should be held and some that should not be held?
The solution answers a few problems on economic order quantity and cash balances.