5fnce001c financial Management 2022-2023 Seminar 10 Question 1

5FNCE001C Financial Management 2022-2023
Seminar 10
Question 1
W Co is a retailer of barrels. The company has an annual demand of 30,000 barrels. The barrels cost $2 each. Fresh supplies can be obtained immediately, with ordering and transport costs amounting to $200 per order. The annual cost of holding one barrel in stock is estimated to be $1.20.
A 2% discount is available on orders of at least 5,000 barrels and a 2.5% discount is available if the order quantity is 7,500 barrels or above.
Required
Calculate the EOQ ignoring the discount and determine if it would change once the discount is considered.
Question 2
D Co uses component V22 in its construction process. The company has a demand of 45,000 components pa. They cost $4.50 each. There is no lead-time between order and delivery, and ordering costs amount to $100 per order. The annual cost of holding one component in inventory is estimated to be $0.65.
A 0.5% discount is available on orders of at least 3,000 components and a 0.75% discount is available if the order quantity is 6,000 components or above.
Required
Calculate the optimal order quantity.
Question 3
Using the data for question 1, assume that the company adopts the EOQ as its order quantity and that it now takes two weeks for an order to be delivered.
Required
How frequently will the company place an order? How much inventory will it have on hand when the order is placed?
Question 4
Using the data relating to question 2, and ignoring discounts, assume that the company adopts the EOQ as its order quantity and that it now takes three weeks for an order to be delivered.
Required

1. 
   How frequently will the company place an order?
   
2. 
   How much inventory will it have on hand when the order is placed?
   

Question 5

1. 
   Gogo plc is a retailer of large storage boxes. The company has an annual demand of 120,000 units. The costs incurred each time an order is placed are $200. The carrying cost per unit of the item each month is estimated at $3. The purchase price of each unit is $4. The economic order quantity formula is:
   

When using this formula to find the optimal quantity to be ordered which of the following amounts are not included in the calculation?

1. 
   Cost per order $200
   
2. 
   Carrying cost per unit $3
   
3. 
   Purchase price per unit $4
   
4. 
   Estimated usage of the inventory item over a particular period 120,000 units
   
1. 
   The Economic Order Quantity (EOQ):
   
   1. 
      is a formula that calculates a realistic purchase price for an item
      
   2. 
      determines the lowest order quantity by balancing the cost of ordering against the cost of holding inventory
      
   3. 
      is used to calculate how much safety inventory should be carried
      
   4. 
      should be calculated once a year
      
2. 
   Which of the following statements is true?
   

Statement 1 The re-order level is the measure of inventory at which a replenishment order should be made.
Statement 2 Use of a re-order level builds in a measure of safety inventory and minimizes the risk of the organization running out of inventory.

1. 
   Both statements
   
2. 
   Statement 1 only
   
3. 
   Statement 2 only
   
4. 
   Neither statement
   
1. 
   Periodic review means …
   
   1. 
      Ordering inventory at a fixed and regular time interval
      
   2. 
      Ordering inventory when it falls below the designated safety inventory level
      
   3. 
      Ordering inventory in consultation with suppliers relative to their available capacity
      
   4. 
      Ordering inventory at a pre-determined re-order level