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Current Asset Management Solutions 4

# Current Asset Management Solutions 4 - safety stock...

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Old Exam Questions - Current Asset Management - Solutions Page 4 of 21 Pages 5. A company believes that it will need to order 100,000 units of inventory over the coming year. The current price per unit of inventory is \$3 per unit. Fixed ordering charges for inventory are \$150 per order and carrying costs for inventory are equal to 10 percent of the average value (price) of the inventory carried. As you can calculate, the optimal order quantity is: Q* = [(2)(\$150)(100,000) / (.10)(\$3)] 1/2 = 10,000 units And the firm will place 10 orders per year. Assume that the firm has the option of taking a 10 percent discount (price of \$2.70 per nit) if it orders 20,000 units per order (5 orders per year). You should now be able to determine whether it is in the firm's best interest to take the discount. Now assume that the firm has decided to carry, on a permanent basis, 2,000 units of
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Unformatted text preview: safety stock. Determine the amount that the firm will save if it takes the quantity discount and the total inventory costs that will be incurred if the firm both takes the quantity discount and carries safety stocks of 2,000 units. A. \$25,500 and \$3,890 B. \$25,550 and \$3,990 C. \$27,550 and \$3,790 D. \$29,550 and \$3,890 * E. \$29,550 and \$3,990 Original TIC = (10,000/2)(\$3)(.10) + (\$150)(10) Original TIC = \$1,500 + \$1,500 = \$3,000 Quantity Discount : New TIC = (20,000/2)(\$2.70)(.10) + (\$150)(5) New TIC = \$2,700 + \$750 = \$3,450 Increase in TIC = \$3,450 - \$3,000 = \$450 Savings on Discounts = (100,000)(\$0.30) = \$30,000 Net Savings = \$30,000 - \$450 = \$29,550 Quantity Discount and Safety Stocks : Average Inventory = (20,000/2) + 2,000 = 12,000 units New TIC = (12,000)(\$2.70)(.10) + (\$150)(5) New TIC = \$3,240 + \$750 = \$3,990...
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