Question

1. From the figures given below, calculate Economic OrderQuantity (EOQ) and Total cost at E0Q? Total consumption of material per year Unit cost of material10,000 kgsBuying cost per order $ 50$ 2 per kgCarrying and storage cost 8%2. The XR stocks carpet in its warehouse and sells it through anadjoining showroom. The store keeps several brands and styles of carpet in stock; however, its biggest seller is Super Shag carpet. The store wants to determine the optimal order size and total inventory cost for this brand of carpet given an estimated annual demand of 10,000 yards of carpet, an annual carrying cost of $0.75 per yard, and an ordering cost of $150. The store would also like to know the number of orders that will be made annually and the time between orders (i.e., the order cycle) given that the store is open every day except Sunday, Thanksgiving Day, and Christmas Day (which is not on a Sunday)3. Let's imagine a company we called XY Inc. Nile is a vegetableretailer who has the following metrics - Cost of Goods Sold (COGS) = $365 Average inventory $10 (they have low levels of inventory in general) Sales $1095 Accounts Receivable = $30 Accounts Payable $30What is cash conversion cycle?

Answer 1

Answer to Question : 1

Given Information,

1. Total consumption of material per year=10,000 kgs
2. Unit cost of material:$2 per kg
3. Carrying and storage cost :8%
4. Buying cost per order :$ 50

Calculation of EOQ:

where,A= Annual requirement of Material =10,000 kg

B= Buying cost per order= $50 per order

C= Carrying cost per unit per annuam= 8%*$2=$ 0.16 per unit per annum

Calculation of EOQ=

=

=

=2500 kg

Number of orders per year= Annual requirement/Quantities ordered

=10,000 kg/2500 kg

=4 orders

Tota cost at EOQ=$21,800

1	Material	10,000 kg *$2	$20,000
2	Buying cost	$50*4orders	$200
3	Carrying cost	$20,000*8%	$1,600
	Total cost		$21,800

Answer to Question : 2

Given Information,

1. Estimated Annual demand=10,000 yards of carpet
2. Annual carrying cost=$0.75 per yard
3. Ordering cost= $150
4. Days store is closed=the store is open every day except Sunday i.e 365 days/7 days=52 sunday+1 Thanksgiving Day +1and Christmas Day (which is not on a Sunday)=52 days+1+1=54 days closed

Optimal Order size==

where,A= Annual requirement of Material =10,000 yards

B= Buying cost per order= $150 per order

C= Carrying cost per unit per annuam= $0.75 per per yard

Optimal Order size==

=

=

=2000 yards

Calculation of number of orders=Annual usage/Optimal Order size

=10,000 yards/2000 yards

=5 orders

Calculation of time between order i.e Order cycle=Number of days the store is open per annum /Number of orders per annum( assumed that orders are given only on working daysi.e 365 days-54 days)

=365 days-54 days/5 orders

=62.2 days

=62 days approx.

Answer to Question : 3

Given Information,

1. Cost of goods sold=$365
2. Average Inventory=$10
3. Sales=$1095
4. Account Receivable=$30
5. Account Payable=$30

Calculation of Cash Conversion Cycle=DIO+DSO-DPO

where, DIO= Days Inventory Outstanding

DSO= Days Sales Outstanding

DPO=Days Payable Outstanding

DIO= Days Inventory Outstanding=(Average Inventory/Cost of Goods sold)*365

=($10/$365)*365days

=10 days

DSO= Days Sales Outstanding=(Average Accounts Receivable/Sales)*365

=($30/$1095)*365 days

=10 days

DPO=Days Payable Outstanding=(Average Accounts Payable/Cost of goods sold)*365

=($30/$365)*365 days

=30 days

Cash Conversion Cycle=DIO+DSO-DPO

=10 days+10 days-30 days

=10 days negative

Note: Company needs less time to sell its inventory & receive cash from customers as compared to the time in which company pays to it suppliers.

Please feel free to reach or comment back if you need further clarity or something is missing.