FM12 Ch 28 Solutions Manual - Chapter 28 Advanced Issues in...

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Chapter 28 Advanced Issues in Cash Management and Inventory Control 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 that 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. The red line method is a technique for inventory control, as is the two-bin method. Computerized inventory control systems are just what the name implies. In the red line method, a line is drawn around the inside of a bin at the level of the reorder point, and the inventory clerk places an order when the red line shows. The two-bin method is similar--when the first bin is exhausted, items are ordered. With a computerized inventory control system, the computer starts with an inventory count in memory. As withdrawals are made, they are recorded by the computer, and the inventory balance is revised. When the reorder point is reached, the computer automatically places an order, and when the order is received, the recorded balance is increased. f. Just-in-time systems refer to receiving inventories just as they are needed. Firms that employ such systems are attempting to minimize inventory carrying costs. Out-sourcing is the practice of purchasing components rather than making them in-house. Answers and Solutions: 28 - 1
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28-2 a. Our suppliers switch from delivering - by train to air freight. (a below) b. We change from producing just in time to 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)
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This note was uploaded on 11/17/2010 for the course FI 515 FI 515 taught by Professor Senn during the Spring '10 term at Keller Graduate School of Management.

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FM12 Ch 28 Solutions Manual - Chapter 28 Advanced Issues in...

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