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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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