Compute the economic order quantity, Financial Management

Assignment Help:

Q. Compute the economic order quantity?

TNG has a current order size of 50000 units

Average number of orders per year = demand/order size = 255380/50000 = 5·11 orders

Annual ordering cost = 5·11 * 25 = $127·75

Buffer stock held = 255380 × 28/365 = 19591 units

Average inventory held = 19591 + (50000/2) = 44591 units

Annual holding cost = 44591 × 0·1 = $4459·10

Annual cost of current ordering policy = 4459·10 + 127·75 = $4587

We need to compute the economic order quantity:

EOQ = ((2 × 255380 × 25)/0·1)0·5 = 11300 units

Average number of orders per year = 255380/11300 = 22·6 orders

Annual ordering cost = 22·6 × 25 = $565·00

Average inventory held = 19591 + (11,300/2) = 25241 units

Annual holding cost = 25241 × 0·1 = $2524·10

Annual cost of EOQ ordering policy = 2524·10 + 565·00 = $3089

Saving compared to current policy = 4587 - 3089 = $1498

(c)

Annual credit purchases = 255380 × 11 = $2809180

Current payables = 2809180 × 60/365 = $461783

Payables if discount is taken = 2809180 × 20/365 = $153928

Reduction in payables = 461,783 - 153,928 = $307,855

Finance cost increase = 307855 × 0·08 = $24628

Discount gained = 2809180 × 0·01 = $28091

Net benefit of taking discount = 28091 - 24628 = $3463

The discount is monetarily acceptable.

An alternative approach is to compute the annual percentage benefit of the discount.

This is able to be done on a simple interest basis

(1/(100 - 1)) × (365/40) = 9·2%

On the other hand the equivalent annual rate can be calculated

(100/(100 - 1))365/40 - 1 = 9·6%

Both methods point out that the annual percentage benefit is greater than the current cost of short-term debt (8%) of TNG and therefore can be recommended on financial grounds.


Related Discussions:- Compute the economic order quantity

Explain hedging transaction exposure, Discuss and compare hedging transacti...

Discuss and compare hedging transaction exposure by using the forward contract vs. money market instruments. While do the alternative hedging approaches generate similar result?

State the examples of tests of controls, State the Examples of tests of con...

State the Examples of tests of controls: Check bank reconciliation has been reconciled as approved by chief accountant. Observe buyer checking the goods received note a

Activity-based budgeting - abb, It is a method of budgeting in which the ac...

It is a method of budgeting in which the actions that incur costs in every functional area of a company are recorded and their relationships are defined and evaluated. Activities a

Bonds/debentures, Bond are formal certificates issued by the companie...

Bond are formal certificates issued by the companies or government agencies acknowledging the indebtedness. To the investors, they are proofs of investment. In th

Bonds Valuation, Six years ago . the singleton company sold a 20 year bond ...

Six years ago . the singleton company sold a 20 year bond with a 14% annual coupon rate and a 9% call premium. today, singleton called the bonds. the bonds originally were sold at

Operating cycle of company, calculate the operating cycle of company which ...

calculate the operating cycle of company which gives the following details relating to its operations. Particular raw material consumption per annum 842000. Annual cost of producti

Required rate of return , Required Rate of Return (R i )  The required...

Required Rate of Return (R i )  The required rate of return (Ri) is the minimum rate of return that a project must generate if it has to receive funds.  It’s thus the opportun

What is gatt, What is GATT, and what is its goal? GATT is the General A...

What is GATT, and what is its goal? GATT is the General Agreement on Tariffs and Trade it is a agreement that seeks to decrease trade barriers among participant nations.

Mr.Manikanta, can u tell me the various approaches followed by FMCG Compani...

can u tell me the various approaches followed by FMCG Companies in test markets

Determine about the call and put option, Determine about the call and put o...

Determine about the call and put option A call/ put option provision allow both issuing company and investor to redeem the bonds at a specified amount before maturity date. Lon

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd