Written Assignment 7

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Denise Davison
FIN 301 – November 2012
Written Assignment 7
January 6, 2013

Chapter 25 Problem Set

3a. What is the EOQ for a firm that sells 5,000 units when the cost of placing an order is $5 and the carrying costs are $3.50 per unit? EOQ = [(2SO)/C]^.5 = [(2)(5,000)($5)/$3.50]^.5 = 119.5 units

3b. How long will the EOQ last? How many orders are placed annually? Annual number of orders:| Alternative calculation of annual number of orders:| Sales per day: 5,000/365 = 13.7 units (i.e., 14 units)

Duration of the EOQ: 120/13.7 = 8.8 days (i.e., 9 days)
Annual number of orders: 365/8.8 = 41.4
(i.e., 42 orders a year)| 5,000/119.5 = 42 (orders per year)| 3c. As a result of lower interest rates, the financial manager determines the carrying costs are now $1.80 per unit. What are the new EOQ and annual number of objects? EOQ = [(2SO)/C].5 = [(2)(5,000)($5)/$1.80].5 = 166.7 units| Annual number of orders: 5000/166.7 = 30| Alternative calculation: Sales per day: 5,000/365 = 13.7 units (i.e., 14 units)

Duration of the EOQ: 166.7/13.7 = 12.2 days
(i.e., 12 days)|
Annual number of orders: 365/12.2 = 29.9 (i.e., 30 orders a year)|

4. Given the following information:
Annual sales in units| 30,000|
Cost of placing an order| $60.00|
Per-unit carrying costs| $1.50|
Existing units of safety stock| 300|
a. What is the EOQ?
EOQ = [2(30,000)($60)/$1.50]^.5 = 1,549 units
b. What is the average inventory based on the EOQ and the existing safety stock? Average inventory: EOQ/2 + safety stock
= 1,549/2 + 300 = 1074.5 units
c. What is the maximum level of inventory?
Maximum level of inventory: 1,549 + 300 = 1,849 units
d. How many orders are place each year?
Orders placed each year: 30,000/1,549 = 19 orders

14. What is the effective, compound rate of interest you earn if you enter into a repurchase agreement in which you buy a Treasury bill for $76,789 and agree to sell it after a month (30...
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