Ch28 Solations Brigham 10th E

Ch28 Solations Brigham 10th E - Chapter 28 Working Capital...

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Chapter 28 Working Capital Management: Extensions ANSWERS TO END-OF-CHAPTER QUESTIONS 28-1 a. The Baumol model is a model for establishing the firm's target cash balance that closely resembles the EOQ model used for inventory. The model assumes (1) that the firm uses cash at a steady, predictable rate, (2) that the firm's cash inflows from operations also occur at a steady, predictable rate, and (3) that its net cash outflows therefore also occur at a steady rate. The model balances the opportunity cost of holding cash against the transactions costs associated with replenishing the cash account. b. Carrying costs are the costs of carrying inventory. Ordering costs are the costs of ordering inventory. Total inventory costs are the sum of ordering and carrying costs. c. The Economic Ordering Quantity (EOQ) is the order quantity which minimizes the costs of ordering and carrying inventories. The EOQ model is the equation used to find the EOQ. The range around the optimal ordering quantity that may be ordered without significantly affecting total inventory costs is the EOQ range. d. The reorder point is the inventory level at which a new order is placed. Safety stock is inventory held to guard against larger- than-normal sales and/or shipping delays. e. An aging schedule breaks down accounts receivable according to how long they have been outstanding. This gives the firm a more complete picture of the structure of accounts receivable than that provided by days sales outstanding. Days sales outstanding (DSO) is a measure of the average length of time it takes a firm's customers to pay off their credit purchases. f. The payments pattern approach is a procedure which measures any changes that might occur in customers' payment behavior. The advantage of this approach is that it is not affected by changes in sales levels due to cyclical or seasonal factors. The uncollected balances schedule, which is an integral part of the payments pattern approach, helps a firm monitor its receivables better and also forecast future receivables balances. 28-2 a. Our suppliers switch from delivering - by train to air freight. (a below) b. We change from producing just in time to 28 - 1
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meet seasonal sales to steady, year-round + production. c. Competition in the markets in which 0 we sell increases. (c below) d. The rate of general inflation increases. 0 e. Interest rates rise; other things - are constant. (e below) (a) Lower safety stock will be required because delivery time is shortened. (c) On the one hand, the need to stay competitive may require large inventories, but if the market gets competitive, sales may fall off and the need for inventories may diminish. (e) EOQ and inventories are lower, since carrying costs are higher.
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This note was uploaded on 08/08/2008 for the course ECON 103 taught by Professor Lin during the Spring '08 term at Rutgers.

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Ch28 Solations Brigham 10th E - Chapter 28 Working Capital...

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