CASH & INVENTORY MANAGEMENTQ1) Clean Air company is a distributor of air filter to retail stores. It buys its filters from several manufacturers. Filters are ordered in lot sizes of 1,000, and each order costs Rs 40 to place. Demand from retails stores is Rs 20,000 filters per month, and carrying cost is Rs 0.10 a filter per month. a. What is the optimal order quantity with respect to so many lot sizes (that is, what multiple of 1,000 units should be ordered)?

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b. What would be the optimal order quantity if the carrying cost were cut in half to Rs 0.05 a filter per month?

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c. What would be the optimal order quantity if the carrying cost were reduced to Rs 10 per order?

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Q2) A college bookstore is attempting to determine the optimal order quantity for a popular book on Economics. The store sells 5,000 copies of this book a year at a retail price of Rs 125, and the cost to the store is 20 percent less, which represents the discount from publisher. The store figures that it costs Rs 1 per year to carry a book in inventory and Rs 100 to prepare an order for new books. a. Determine the total inventory costs associated with ordering 1, 2, 5, 10, and 20 times a year.

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b. Determine the economic order quantity.

c. What implicit assumptions are being made about the annual sales rate?

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Q3) y y y y Demand = 2500 Units Ordering Cost = Rs. 20 per order Carrying Cost = 30% of Unit P.Price of Rs. 6 per unit Find out EOQ and Total Cost

If we reduce our average inventory by 20% we will free up our cash. What is the minimum rate of return that we have to invest the excess cash to justify the reduction in the average inventory?

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Q4) The Pawlowski Supply Company needs to increase its working capital by Rs 4.4 million. The following three financing alternatives are available (assume a 365-day year): a. Forgo cash discounts (granted on a basis of 3/10, net 30 ) and pay on the final due date. b. Borrow Rs 5 million from a bank at 15 percent interest. This alternative would necessitate maintaining a 12 percent compensating balance. c. Issue Rs 4.7 million of six-month commercial paper to net Rs 4.4 million. Assume that new paper would be issued every six months. (Note: Commercial paper has no stipulated interest rate. It is sold at a discount, and the amount of the discount determines the interest and cost to the issuer.) Assuming that the firm would prefer the flexibility of bank financing, provided the additional cost of this flexibility was no more than 2 percent per annum, which alternative should Pawlowski select? Why?

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