fm28 1 - Chapter 28 Advanced Issues in Cash Management and...

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Answers and Solutions: 28 - 1 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
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