tailieunhanh - Lecture Managerial finance - Chapter 28: Advanced issues in cash management and inventory control

Chapter 28 provides knowledge of advanced issues in cash management and inventory control. After studying this chapter you will be able to understand: Setting the target cash balance, EOQ model, Baumol model. | Chapter 28 Advanced Issues in Cash Management and Inventory Control Topics in Chapter Setting the target cash balance EOQ model Baumol Model Why is inventory management vital to the financial health of most firms? Insufficient inventories can lead to lost sales. Excess inventories means higher costs than necessary. Large inventories, but wrong items leads to both high costs and lost sales. Inventory management is more closely related to operations than to finance. Total Inventory Costs (TIC) TIC = Total carrying costs+ total ordering costs TIC = CP(Q/2) + F(S/Q). C = Annual carrying costs (% of inv.). P = Purchase price per unit. Q = Number of units per order. F = Fixed costs per order. S = Annual usage in units. EOQ = Q* = 2FS CP Derive the EOQ model from the total cost equation TIC Carrying Cost Ordering Cost 0 EOQ Units $ Average inventory = EOQ/2. Inventory Model Graph Assume the following data: P = $200. F = $1,000. S = 5,000. C = . Minimum order size = . | Chapter 28 Advanced Issues in Cash Management and Inventory Control Topics in Chapter Setting the target cash balance EOQ model Baumol Model Why is inventory management vital to the financial health of most firms? Insufficient inventories can lead to lost sales. Excess inventories means higher costs than necessary. Large inventories, but wrong items leads to both high costs and lost sales. Inventory management is more closely related to operations than to finance. Total Inventory Costs (TIC) TIC = Total carrying costs+ total ordering costs TIC = CP(Q/2) + F(S/Q). C = Annual carrying costs (% of inv.). P = Purchase price per unit. Q = Number of units per order. F = Fixed costs per order. S = Annual usage in units. EOQ = Q* = 2FS CP Derive the EOQ model from the total cost equation TIC Carrying Cost Ordering Cost 0 EOQ Units $ Average inventory = EOQ/2. Inventory Model Graph Assume the following data: P = $200. F = $1,000. S = 5,000. C = . Minimum order size = 250. What is the EOQ? EOQ = = = 250,000 = 500 units. 2($1,000)(5,000) ($200) $10,000,000 40 What are total inventory costs when the EOQ is ordered? TIC = CP(Q/2) + F(S/Q) = ()($200)(500/2) + $1,000(5,000/500) = $40(250) + $1,000(10) = $10,000 + $10,000 = $20,000. Additional Notes Average inventory = EOQ/2 Average inventory = 500/2 = 250 units. # of orders per year = S/EOQ # of orders per year = $5,000/50 = 10. At EOQ, total carrying costs = total ordering costs. Notes about EOQ At any quantity ≠ EOQ, total inventory costs are higher than necessary. The added cost of not ordering the EOQ is not large if the quantity ordered is close to EOQ. If Q EOQ, total carrying costs increase, but ordering costs decrease. Suppose delivery takes 2 weeks. Assuming certainty in delivery and usage, at what inventory level should the firm reorder? Weekly usage rate = 5,000/52 = 96 units. If order