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Despite the fact that the use of the eoq model is

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Unformatted text preview: EOQ. The resulting equation is EOQ 2 SO C (14.7) Although the EOQ model has weaknesses, it is certainly better than subjective decision making. Despite the fact that the use of the EOQ model is outside the control of the financial manager, the financial manager must be aware of its utility and must provide certain inputs, specifically with respect to inventory carrying costs. Reorder Point Once the firm has determined its economic order quantity, it must determine when to place an order. The reorder point reflects the firm’s daily usage of the inventory item and the number of days needed to place and receive an order. Assuming that inventory is used at a constant rate, the formula for the reorder point is Reorder point Days of lead time Daily usage (14.8) CHAPTER 14 safety stock Extra inventory that is held to prevent stockouts of important items. EXAMPLE Working Capital and Current Assets Management 609 For example, if a firm knows it takes 3 days to place and receive an order, and if it uses 15 units per day of the inventory item, then the reorder point is 45 units of inventory (3 days 15 units/day)....
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