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Exam 23: Advanced Issues in Cash Management and Inventory Control

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Question 1

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Halliday Inc.receives a $2 million payment once a year.Of this amount,$700,000 is needed for cash payments made during the next year.Each time Halliday deposits money in its account,a charge of $2.00 is assessed to cover clerical costs.If Halliday can hold marketable securities that yield 5 percent,and then convert these securities to cash at a cost of only the $2 deposit charge,what is the total cost for one year of holding the minimum cost cash balance according to the Baumol model?

A) $7,483
B) $187
C) $3,741
D) $374
E) $748

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

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Question 2

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Gemini Inc.'s optimal cash transfer amount,using the Baumol model,is $60,000.The firm's fixed cost per cash transfer of marketable securities to cash is $180,and the total cash needed for transactions annually is $960,000.On what opportunity cost of holding cash was this analysis based?

A) 19.2%
B) 10.4%
C) 6.3%
D) 12.1%
E) 9.6%

F) A) and D)
G) None of the above

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Question 3

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

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.

Exhibit 23.2 Cartwright Computing 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.) -Refer to Exhibit 23.2.If the lead time for placing an order is 5 days,and Cartwright holds a safety stock equal to a 30-day supply of chips,then at what inventory level should an order be placed?

Exhibit 23.3 Assume that Palmer Executive Pens uses 1,440,000 gallons of ink each year. Further, assume that Palmer can order the ink at a cost of $2 per gallon plus fixed ordering costs of $100 per order. The firm's carrying cost is 20 percent of the inventory value, at cost. -Refer to Exhibit 23.3.What is Palmer's minimum costs of ordering and holding inventory?

Exhibit 23.2 Cartwright Computing 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.) -Refer to Exhibit 23.2.If Cartwright holds a safety stock equal to a 30-day supply of chips,what is Cartwright's minimum cost of ordering and carrying inventory?

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

Gemini Inc.'s optimal cash transfer amount,using the Baumol model,is $60,000.The firm's fixed cost per cash transfer of marketable securities to cash is $180.In addition,the total estimated cash costs (transfers and carrying cost) for the firm,based on 16 transactions per year,are $5,760.On what opportunity cost of holding cash was this analysis based?

Exhibit 23.1 The Duckett Group is trying to determine its optimal average cash balance. The firm has determined that it will need $5,000,000 net new cash during the coming year. The fixed transaction cost of converting securities to cash is $50, and the firm earns 10 percent on its marketable securities investments. -Refer to Exhibit 23.1.What will be the total cost to Duckett of maintaining the optimal average cash balance,as determined by the Baumol model?

Exhibit 23.1 The Duckett Group is trying to determine its optimal average cash balance. The firm has determined that it will need $5,000,000 net new cash during the coming year. The fixed transaction cost of converting securities to cash is $50, and the firm earns 10 percent on its marketable securities investments. -Refer to Exhibit 23.1.According to the Baumol model,what should be Duckett's average cash balance?

Exhibit 23.3 Assume that Palmer Executive Pens uses 1,440,000 gallons of ink each year. Further, assume that Palmer can order the ink at a cost of $2 per gallon plus fixed ordering costs of $100 per order. The firm's carrying cost is 20 percent of the inventory value, at cost. -Refer to Exhibit 23.3.Now,suppose the manufacturer offers a discount of 0.5 percent for orders of a least 40,000 gallons.Should Palmer increase its ordering quantity to take the discount?

Exhibit 23.2 Cartwright Computing 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.) -Refer to Exhibit 23.2.What is the economic ordering quantity for chips?

Each year,Holly's Best Salad Dressing,Inc.(HBSD) purchases 50,000 gallons of extra virgin olive oil.Ordering costs are $100 per order,and the carrying cost,as a percentage of inventory value,is 80 percent.The purchase price to HBSD 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 HBSD orders 10,000 gallons at a time.Should HBSD take the discount?

Exhibit 23.2 Cartwright Computing 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.) -Refer to Exhibit 23.2.Assume that Cartwright holds a safety stock equal to a 30-day supply of chips.What is the maximum amount of inventory that will have on hand at any time,that is,what will be the inventory level right after a delivery is made?

Suppose Stanley's Office Supply purchases 50,000 boxes of pens every year.Ordering costs are $100 per order and carrying costs are $0.40 per box.Moreover,management has determined that the EOQ is 5,000 boxes.The vendor now offers a quantity discount of $0.20 per box if the company buys pens in order sizes of 10,000 boxes.Determine the before-tax benefit or loss of accepting the quantity discount.(Assume the carrying cost remains at $0.40 per box whether or not the discount is taken.)

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

Which of the following would cause average inventory holdings to decrease,other things held constant?

Humphrey's Housing 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?

Exhibit 23.2 Cartwright Computing 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.) -Refer to Exhibit 23.2.How many orders should Cartwright place during the year?