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Ch22MiniCase

# Ch22MiniCase - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18...

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Ch 22 Mini Case 3/27/2003 Chapter 22. Mini Case for Other Topics in Working Capital Management a. Why is inventory management vital to the health of most firms? b. What assumptions underlie the EOQ Model? The standard form of the EOQ model requires the following assumptions: · All values are known with certainty and constant over time. · Inventory usage is uniform over time. For example, a retailer would sell the same number of units each day. · All carrying costs are variable, so carrying costs change proportionally with changes in inventory levels TIC = total carrying costs + total ordering costs = CP(Q/2) + F(S/Q) C = annual carrying cost as a percentage of inventory value. P = purchase price per unit. Q = number of units in each order. F = fixed costs per order. S = annual usage in units. Solving for Q gives us: d. What is the EOQ for custom microchips? What are total inventory costs if the EOQ is ordered? TIC = CP(Q/2) + F(S/Q) = 0.2(\$200)(500/2) + \$1,000(5,000/500) Andria Mullins, financial manager of Webster Eelectronics, has been asked by the firm's CEO, Fred Weygandt, to evaluate the company's inventory control techniques and to lead a discussion of the subject with the senior executives. Andria plans to use as an example one of Webster's "big ticket" items, a customized computer microchip which the firm uses in its laptop computer. Each chip costs Webster \$200, and in addition it must pay its supplier a \$1,000 setup fee on each order. Further, the minimum order size is 250 units; Webster's annual usage forecast is 5,000 units; and the annual carrying cost of this item is estimated to be 20 percent of the average inventory value. Andria plans to begin her session with the senior executives by reviewing some basic inventory concepts, after which she will apply the EOQ model to Webster's microchip inventory. As her assistant, you have been asked to help her by answering the following questions: Inventory management is critical to the financial success of most firms. If insufficient inventories are carried, a firm will lose sales. Conversely, if excess inventories are carried, a firm will incur higher costs than necessary. Worst of all, if a firm carries large inventories, but of the wrong items, it will incur high costs and still lose sales.

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