Question

A. AIA Inc. is looking to manage its cash position using the EOQ model. The company is consuming cash at the rate of $5700 per day, and is open for business 365 days in the year. Each time the firm sells securities to obtain the cash, it costs them $200. If the interest rate is 2.50%, what is the optimal order amount according to the EOQ?

B. AIA Inc. is looking to manage its cash position using the EOQ model. The company is consuming cash at the rate of $5800 per day, and is open for business 365 days in the year. Each time the firm sells securities to obtain the cash, it costs them $250. The interest rate is 2.10%. What are the annual order costs associated with the EOQ?

Please show work

Answer 1

Part A

Annual Demand (A) = $5700 x365

                                     = $2,080,500

Holding cost (C ) = 2.5%

Ordering cost (O) = $200

We have following formula for EOQ:

EOQ = (2 x A x O / C)^0.50

         = (2 x 2080500 x 200/ 0.025)^0.50

         = $182449.99 or $182,450

Part B

Annual Demand (A) = $5800 x365

                                     = $2,117,000

Holding cost (C ) = 2.1%

Ordering cost (O) = $250

We have following formula for EOQ:

EOQ = (2 x A x O / C)^0.50

         = (2 x 2117000 x 250/ 0.021)^0.50

         = $224,510

Annual Order Cost = A / EOQ     x O

                                   = $2117000/ $224,510     x $250

                                   = $2,357.36