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Exam 28: Advanced Issues in Cash Management and Inventory Control

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Question 1

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Now, suppose the manufacturer offers a discount of 0.5 percent for orders of a least 40,000 yards. Should Fashion Clothiers increase its ordering quantity to take the discount?

A) Yes; it will save $827 if it takes the discount.
B) No; it will lose $827 if it takes the discount.
C) Yes; it will save $14,400 if it takes the discount.
D) Yes; it will save $13,573 if it takes the discount.
E) No; it will lose $13,573 if it takes the discount.

F) A) and E)
G) A) and D)

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Question 2

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Assume that Aberwald holds a safety stock equal to a 30-day supply of chips. What is the maximum amount of inventory that Aberwald will have on hand at any time, that is, what will be the inventory level right after a delivery is made?

A) 9,216
B) 3,175
C) 6,243
D) 13,675
E) 8,124

F) A) and E)
G) A) and D)

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Question 3

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A just-in-time system is designed to stretch accounts payable as long as possible.

If the lead time for placing an order is 5 days, and Aberwald holds a safety stock equal to a 30-day supply of chips, then at what inventory level should an order be placed?

According to the Baumol model, what should be Norris' average cash balance?

(The following information applies to the next six problems.) Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying costs is equal to 20 percent of the purchase price. (Assume a 360-day year.) -What is the economic ordering quantity for chips?

Which of the following is true of the Baumol model? Note that the optimal cash transfer amount is C*?

If Aberwald holds a safety stock equal to a 30-day supply of chips, what is Aberwald's minimum cost of ordering and carrying inventory?

If a company increases its safety stock, then its average inventory will go up.

Crystal Clear Company purchases 50,000 gallons of distilled water each year. Ordering costs are $100 per order, and the carrying cost, as a percentage of inventory value, is 80 percent. The purchase price to CCC is $0.50 per gallon. Management currently orders the EOQ each time an order is placed. No safety stock is carried. The supplier is now offering a quantity discount of $0.03 per gallon if CCC orders 10,000 gallons at a time. Should CCC take the discount?

If a company increases its safety stock, then its EOQ will go up.

(The following information applies to the next three problems.) Assume that Fashion Clothiers Inc. uses 1,440,000 yards of material each year. Further, assume that Fashion can order the material at a cost of $2 per yard, plus fixed ordering costs of $100 per order. The firm's carrying cost is 20 percent of the inventory value, at cost. -What is the firm's EOQ?

The cash balances of most firms consist of transactions, compensating, precautionary, and speculative balances. We can produce a total desired cash balance by calculating the amount needed for each purpose and then summing them together.

Thoroughbred Industries has been practicing cash management for some time by using the Baumol model for determining cash balances. Some time ago, the model called for an average balance (C*/2) of $500; at that time, the rate on marketable securities was 4 percent. A rapid increase in interest rates has driven the interest rate up to 9 percent. What is the appropriate average cash balance now?

If Aberwald holds a safety stock equal to a 30-day supply of chips, what is its average inventory level?

The easier a firm's access to borrowed funds the higher its precautionary balances will be, in order to protect against sudden increases in interest rates.

According to the Baumol model, what is the optimal transaction size for transfers from marketable securities to cash?

Which of the following is true of the EOQ model? Note that the optimal order quantity, Q, will be called EOQ.

For some firms, holding highly liquid marketable securities is a substitute for holding cash because a marketable securities portfolio can accomplish the same objective as cash.

What will be the total cost to Norris of maintaining the optimal average cash balance, as determined by the Baumol model?