Current Asset Management Solutions 21

Current Asset - in inventory costs that will be incurred if the firm both takes the quantity discount and carries safety stocks of 4,000 units A

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Old Exam Questions - Current Asset Management - Solutions Page 21 of 21 Pages charges for inventory are $20.00 per order and carrying costs for inventory are equal to 10 percent of the average value (price, net of discount, if any) of the inventory carried. As you can calculate, the optimal order quantity is: Q* = [(2)($20.00)(250,000) / (.10)($4)] 1/2 = 5,000 units And the firm will place 50 orders per year. Assume that the firm has the option of taking a 4 percent discount (price of $3.84 per unit) if it orders 25,000 units per order (10 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, 4,000 units of safety stock. Based on this information determine the total increase
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Unformatted text preview: in inventory costs that will be incurred if the firm both takes the quantity discount and carries safety stocks of 4,000 units. A. $3,807.00 * B. $4,536.00 C. $3,048.00 D. $2,862.00 E. $2,376.00 Original TIC = (5,000/2)($4)(.10) + ($20.00)(50) Original TIC = $1,000 + $1,000 = $2,000.00 Quantity Discount : New TIC = (25,000/2)($3.84)(.10) + ($20.00)(10) New TIC = $4,800 + $200 = $5,000 Increase in TIC = $5,000 - $2,000 = $3,000 Savings on Discounts = (250,000)($0.16) = $40,000 Net Savings = $40,000 - $3,000 = $37,000, so yes, take the discount Quantity Discount and Safety Stocks : Average Inventory = (25,000/2) + 4,000 = 16,500 units New TIC = (16,500)($3.84)(.10) + ($20.00)(10) New TIC = $6,336.00 + $200.00 = $6,536.00 Increase in TIC = $6,536.00 - $2,000.00 = $4,536.00...
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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