Reference no: EM13380702

1. Novelty Gifts, Inc. is experiencing some inventory control problems. The manager,

Wanda LaRue, currently orders 5,000 units four times each year to handle annual demand of 20,000 units. Each order costs $15 and each unit costs $1.50 to carry. Ms. LaRue maintains a safety stock of 200 units.

a) What is Novelty Gifts' current total annual inventory cost?

b) Calculate the economic ordering quantity (EOQ).

c) What is average inventory under EOQ if Ms. LaRue maintains a safety stock of 200 units.

d) Calculate total annual inventory cost under EOQ.

2. From the following income statement, calculate:

a) Degree of financial leverage.

b) Degree of operating leverage.

c) Degree of combined leverage.

Income Statement
for the year ended 12/31/03

Sales                                              $440,000

TVC                                                 240,000

Fixed costs (FC)                                 96 000

EBIT                                              $104,000

Interes                                                19,200

EBT                                                $ 84,800

Taxes @ 35%                                                    29,680

Net income                                                     $ 55 120

Shares outstanding                             16,000

EPS                                                    $ 3.44

3. Firm X is considering a project and its analysts have projected the following outcomes and their probabilities.

Outcome          Probability of Outcome      Assumptions

$5,250                     25%                    pessimistic

$7,800                     45%                   moderately successful

$13,500                     30%                     optimistic