Week 7 LPS Working Capital Management Part 3 Key PDF

Preview

Summary

JP Rizal St., Poblacion, Pandi, Bulacan (044) 769. collegeofmaryimmaculate.eduWORKING CAPITAL MANAGEMENT (Part 3)RISK AND RETURN TRADE-OFF The greater the risk, the greater is the potenial for larger returns  More current assets lead to greater liquidity but yield lower returns (proit)  Fixed ass...

Description

COLLEGE OF MARY IMMACULATE JP Rizal St., Poblacion, Pandi, Bulacan (044) 769.2021 https://www.collegeofmaryimmaculate.edu.ph

WORKING CAPITAL MANAGEMENT (Part 3) RISK AND RETURN TRADE-OFF  The greater the risk, the greater is the potential for larger returns  More current assets lead to greater liquidity but yield lower returns (profit)  Fixed assets earn greater returns than current assets  Long term financing has less liquidity risk than short term debt, but has a higher explicit cost, hence, lower return BAUMOL CASH MANAGEMENT MODEL – an EOQ-type model which can be used to determine the optimal cash balance where the costs of maintaining and obtaining cash are at the minimum Such costs are the: 1. Cost of securities transactions or cost of obtaining a loan 2. Opportunity cost of holding cash which includes the return foregone by not investing in marketable securities or the cost of borrowing cash. Optimal Cash Balance

√

OC= 2 TD i OC – optimal cash balance T – transaction cost which is a fixed amount per transaction. It includes the cost of securities transactions or cost of obtaining a loan D – total demand for cash over a period of time i – interest rate on marketable securities or the cost of borrowing cash

Exercise: Ben Corporation uses the Baumol cash management model to determine its optimal cash balance. For the coming year, the expected cash disbursements total P432,000. The interest rate on marketable securities is 5% per annum. The fixed cost of selling marketable securities is P8 per transaction. 1. The company’s optimal cash balance is: a. 11,757.55 c. 142,000.00 b. 5,878.78 d. 1,175.76

√

OC= 2 (8 ) (432,000) 5% OC = 11,757.55

2. The average cash balance is: a. 11,757.55 c. 142,000.00 b. 5,878.78 d. 1,175.76 OC / 2 = Average Cash Balance 11,757.55 / 2 = 5,878.78 INVENTORY MANAGEMENT COLLEGEOFMARYI MMACULATE©2020.Al lRi ght sReser v ed. Fort heex c l us i v eus eofOffic i al l yEnr ol l edCMI ansonl y .Unaut hor i z eduse,r epr oduct i on,

s har i ngordi s t r i but i oni sst r i ct l ypr ohi bi t ed.

COLLEGE OF MARY IMMACULATE JP Rizal St., Poblacion, Pandi, Bulacan (044) 769.2021 https://www.collegeofmaryimmaculate.edu.ph

INVENTORY MANAGEMENT – formulation and administration of plans and policies to efficiently and satisfactorily meet production and merchandising requirements and minimize costs relative to inventories INVENTORY MODELS A basic inventory model exists to assist in two (2) inventory questions: 1. How many units should be ordered? 2. When should the units be ordered? Economic Order Quantity (EOQ) – the quantity to be ordered, which minimizes the sum of the ordering and carrying costs  EOQ may be computed as follows:

√

EOQ= 2 a D k Where:

a = cost of placing one order (ordering cost) D = annual Demand in units k = annual cost of carrying one unit in inventory for one year (carrying cost)

Assumptions of the EOQ Model: 1. Demand occurs at a constant rate throughout the year 2. Lead time on the receipt of orders is constant 3. The entire quantity ordered is received at one time 4. The unit costs of the items ordered are constant; thus, there can be no quantity discounts 5. There are no limitations on the size of the inventory  When applied to manufacturing operations, the EOQ formula may be used to compute the Economic Lot Size (ELS): ELS= Where:

√

2a D k a = set-up cost D = annual production requirement k = annual cost of carrying one unit in inventory for one year (carrying cost)

 When the EOQ figure is available, the average inventory is computed as follows: Average Inventory = EOQ / 2  When to Reorder: When to reorder is a stock-out problem, i.e., the objective is to order at a point in time so as not to run out of stock before receiving the inventory ordered but not so early that an excessive quantity of safety stock is maintained Lead Time – period between the time the order is placed and received COLLEGEOFMARYI MMACULATE©2020.Al l Ri ght sReser v ed. Fort heex c l us i v eus eofOffic i al l yEnr ol l edCMI ansonl y .Unaut hor i z eduse,r epr oduct i on, s har i ngordi s t r i but i oni sst r i ct l ypr ohi bi t ed.

COLLEGE OF MARY IMMACULATE JP Rizal St., Poblacion, Pandi, Bulacan (044) 769.2021 https://www.collegeofmaryimmaculate.edu.ph

Normal time usage = Normal lead time x average usage Safety Stock = (Maximum lead time – normal lead time) x Average usage Reorder point if there is NO safety stock required = Normal lead time usage Reorder point if there is safety stock required = Safety stock + Normal lead time usage Or Maximum lead time x Average usage

Exercise: Items 3 to 5 are based on the following information. ML Traders, Inc. sells cellphone cases which it buys from a local manufacturer. ML Traders sells 24,000 cases evenly throughout the year. The cost of carrying one unit in inventory for one year is P11.52 and the order cost per order is P38.40. 3. What is the economic order quantity? a. 400 b. 283

√

c. 200

d. 625

EOQ= 2(38.40 )( 24,000 ) 11.52 EOQ = 400 units

4. If ML Traders would buy in EOQ, the total order costs is: a. P 921,600 b. P 2,304 c. P 76,800 d. P 460,800 Annual demand 24,000 / EOQ 400 = 60 orders x ordering cost 38.40 = 2,304 5. If ML Traders would buy in EOQ, the total inventory carrying costs per year is: a. P 276,480 b. P 2,304 c. P 23,040 d. P 138,240 Carrying cost = Ave.. inventory x CC per unit Average inventory = EOQ / 2 (400 / 2) x 11.52 = 2,304

COLLEGEOFMARYI MMACULATE©2020.Al l Ri ght sReser v ed. Fort heex c l us i v eus eofOffic i al l yEnr ol l edCMI ansonl y .Unaut hor i z eduse,r epr oduct i on, s har i ngordi s t r i but i oni sst r i ct l ypr ohi bi t ed.

COLLEGE OF MARY IMMACULATE JP Rizal St., Poblacion, Pandi, Bulacan (044) 769.2021 https://www.collegeofmaryimmaculate.edu.ph

6. The basic EOQ model equals the square root of the (1) product of twice the demand times the cost per order, (2) divided by the periodic carrying cost per unit. If the annual demand increases by 44%, the EOQ will increase (decrease) by: a. 6.63% b. 20% c. 9.38% d. 12% EOQ= 2 a D k

√ √

EOQ= 2 a(1.44 D) k

√

EOQ= 1.44 (2 a D ) k 1.2= 2 a D k

√

√

400=

2(38.40 )(24,000) 11.52

√ √

EOQ= 2(38.40)(24,000 x 1.44 ) 11.52 EOQ=

2(38.40 )(34,560 ) 11.52 EOQ = 480

New 480 - Old 400 = 80 / 400 = 20% increase Items 7 to 8 are based on the following information. The following information is available for Skin Corporation’s Material X. Annual usage 12,600 units Working days per year 360 days Normal lead time 20 days The units of Material X are required evenly throughout the year. 7. What is the reorder point? a. 35 units b. 2oth day

c. 700 units

d. 630 units

Reorder point if there is NO safety stock required = Normal lead time usage Reorder point if there is safety stock required = Safety stock + Normal lead time usage Or Maximum lead time x Average usage Annual usage 12,600 / 360 = 35 units average daily usage x 20 days = 700 units

COLLEGEOFMARYI MMACULATE©2020.Al l Ri ght sReser v ed. Fort heex c l us i v eus eofOffic i al l yEnr ol l edCMI ansonl y .Unaut hor i z eduse,r epr oduct i on, s har i ngordi s t r i but i oni sst r i ct l ypr ohi bi t ed.

COLLEGE OF MARY IMMACULATE JP Rizal St., Poblacion, Pandi, Bulacan (044) 769.2021 https://www.collegeofmaryimmaculate.edu.ph

8. Assuming that occasionally, the company experiences delay in the delivery of Material X, such that the lead time reaches a maximum of 30 days, how many units of safety stock should the company maintain and what is the reorder point? Safety Stock Reorder Point a. 350 1,050 b. 350 700 c. 0 1,050 d. 1,050 700 Maximum lead time Less Normal lead time Maximum no. of delays Multiply by average daily usage (12,600 / 360) Safety stock

30 days (20) 10 days 35 units 350 units

Normal lead time usage + Safety stock = Reorder Point 700 units + 350 units = 1,050 units Or Average daily usage 35 units x Maximum lead time 30 days = 1,050 units 9. The following information pertains to Ofel Corporations Material X: Annual usage 25,200 units Working days per year 360 days Normal lead time in working days 30 days Safety stock 1,050 units The maximum lead time in working days and the reorder point for Material X are: Maximum Lead Time Reorder Point a. 30 days 2,100 b. 15 days 1,050 c. 45 days 3,150 d. 45 days 2,100 Safety stock Divide by Average daily usage (25,200 / 360) Maximum days of delay Plus Normal lead time Maximum Lead time

1,050 units 70 units 15 days 30 days 45 days

Maximum Lead time 45 days x ave. daily usage 70 units = 3,150 units Reorder point

COLLEGEOFMARYI MMACULATE©2020.Al l Ri ght sReser v ed. Fort heex c l us i v eus eofOffic i al l yEnr ol l edCMI ansonl y .Unaut hor i z eduse,r epr oduct i on, s har i ngordi s t r i but i oni sst r i ct l ypr ohi bi t ed....