Question

1. Indicate by a (+), (-), or (0) whether each of the following events would probably cause average annual inventory holdings to rise, fall, or be affected in an indeterminate manner. Also provide an explanation for each event and the affects. (5 pts)

                              

a. Our suppliers switch from delivering by train to air freight.                 

b. We change from producing just-in-time to meet seasonal sales to steady, year-round production.

c. Competition in the markets in which we sell increases.       

d. The rate of general inflation increases.           

e. Interest rates rise; other things are constant.                          

2. Assuming the firm’s sales volume remained constant, would you expect it to have a higher cash balance during a tight-money period or during an easy-money period? Why? (2 pts)

3. Explain how each of the following factors would probably affect a firm’s target cash balance if all other factors were held constant. (3 pts)

a. The firm institutes a new billing procedure that better synchronizes its cash inflows and outflows.

​​​​​​​b. The firm develops a new sales forecasting technique that improves its forecasts.

c. ​​​​​​​The firm reduces its portfolio of U.S. Treasury bills.

​​​​​​​d.The firm arranges to use an overdraft system for its checking account.

​​​​​​​e. The firm borrows a large amount of money from its bank and also begins to write far more checks than it did in the past.

​​​​​​​f. Interest rates on Treasury bills rise from 5% to 10%.

4. Economic Ordering Quantity (EOQ). The Gentry Garden Center sells 100,000 bags of lawn fertilizer annually. The optimal safety stock (which is on hand initially) is 1,500 bags. Each bag costs the firm $2.00, inventory carrying costs are 15%, and the cost of placing an order with its supplier is $15. (4 pts)

​​​​​​​a. What is the EOQ?

​​​​​​​b. What is the maximum inventory of fertilizer?

​​c. What will be the firm’s average inventory?

​​​​​d. How often must the company order?

5. Optimal Cash Transfer. Barenbaum Industries projects that cash outlays of $5.4 million will occur uniformly throughout the year. Barenbaum plans to meet its cash requirements by periodically selling marketable securities form its portfolio. The firm’s marketable securities are invested to earn 6%, and the cost per transaction of converting securities to cash is $15. (5 pts)

​​​​​​​a. Use the Baumol model to determine the optimal transaction size for transfers from marketable securities to cash.

​​​​​​b. What will be Barenbaum’s average cash balance? ​​​​​​​

c. How many transfers per year will be required?

​​​​​​​d. What will be Barenbaum’s total annual cost of maintaining cash balances?

​​​​​​​​​​​​​​e. What would the total cost be if the company maintained an average cash balance of $40,000 or of $0 (it deposits funds daily to meet cash requirements, using 360 days)?

Answer 1

(a) When the supplier switches from delivering by traing to air freight, the average inventory holding will rise (+) as the goods will be received much faster by air freight

(b) Moving from JIT to steady production round the year will increase the average inventory holding (+) as in JIT, the inventory holding is negligible bu ensuring a steady round the year production requires holding inventory to meet any unforeseen demand

(c) When the competition increases, everything else remaining constant, the number of goods sold would reduce there-by increasing the average inventory holding (+)

(d) Increase in inflation means that the cost of producing the goods increases. So everything else remaining constant, the average inventory holding will come down (-) so as to ensure that the inventory budget is met

(e) Rising interest rates mean that the consumer spending would go down resulting in lower sales. This would mean the average invnetory holding would go up (+)

P.S. - I have answers the first 5 parts. As per policy, first 4 parts needs to be answered. Please post separate questions