Supply Chains and Working

Capital Management

Chapter 16

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 Learning Objectives

1.Model the cash conversion cycle and explain its

components.
2.Understand why the timing of accounts
receivable is important and explain the
components of credit policy.
3.Understand the concept of float and its effect
on cash flow and explain how to speed up
receivables and slow down disbursements.
4.Explain inventory management techniques and
calculate the economic order quantity (EOQ).
5.Account for working capital changes in capital
budgeting decisions.

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 16.1 The Cash Conversion Cycle

In order to manage working capital efficiently, a firm has to

be aware of how long it takes them, on average, to convert
their goods and services into cash. This length of time is
formally known as the cash conversion cycle.

The cash conversion cycle is made up of 3 separate cycles:

1. The production cycle: i.e. the time it takes to build and
sell the product
2. The collection cycle: i.e. the time it takes to collect from
customers (i.e. collecting accounts receivable) and
3. The payment cycle: i.e. the time it takes to pay for
supplies and labor, i.e. paying accounts payable).

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 13.1 The Cash Conversion Cycle
(continued)

The production cycle and the collection cycle together make up the
operating cycle, so the cash conversion cycle can also be calculated
as follows:
Cash conversion cycle = Operating cycle – Payment cycle.

Figure 13.1 The cash

conversion cycle.

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 13.1 The Cash Conversion Cycle
(continued)
– The production cycle begins when a customer places an order
and ends when the product is shipped out.
– The collection cycle begins when the order is filled and ends
when payment is received.
– The payment cycle begins when labor is hired or raw materials
are received to start production and ends when the firm pays
for purchases, raw materials and other production costs.

• Firms typically have to pay for production costs before

they receive payment from their customers, a longer
cash conversion cycle would tie up their finances and
vice-versa.

• Must keep track of these various cycles and try to

shorten the cash conversion cycle so as to free up much
needed funds.

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 13.1 (A) Average production
cycle
Calculated in 3 steps.
First calculate average inventory as shown in Equation
13.2

Next, calculate the inventory turnover rate as follows:

Lastly, calculate the average production cycle as follows:

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 13.1 (B) Average collection cycle

Makes up the other leg of the operations cycle. It measures

the number of days taken by a firm, on average, to collect its
accounts receivables.
To measure it we first calculate the average accounts
receivable, i.e.

Then we measure the accounts receivable turnover rate as

follows:

Finally, we calculate the average collection cycle, i.e.

Average collection cycle = 365/A/R turnover rate.

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 13.1 (C) Average payment cycle

• Also calculated with the same three steps

• Except that we use the average accounts
payable and accounts payable turnover to
do it.

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 13.1 (D) Putting It All together:
The Cash Conversion Cycle
• Production cycle + Accounts receivable cycle – Payment
cycle = Cash conversion cycle i.e. the number of days
between when a firm incurs an outflow to start
production until it receives payment on a credit sale.

• So if a firm can shorten its production cycle or its

collection cycle, or both, while keeping its payment cycle
constant or lengthened, it can shorten the number of
days that it would typically have to finance its operations
for, thereby reducing its financing costs and increasing
its profits.

• Thus, shortening the cash conversion cycle essentially

requires the efficient management of receivables (credit
policy), inventory, and payables.

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 13.1 (D) Putting It All together: The
Cash Conversion Cycle (continued)
Example 1: Measuring Cash Conversion Cycle.
Mark has just been appointed as the chief financial officer of a mid-
sized manufacturing company and is keen to measure the firm’s cash
conversion cycle, operating cycle, production cycle, collection cycle,
and payment cycle, so as to see if any changes are warranted. He
collects the necessary information for the most recent fiscal year,
and puts together the table below:
Cash sales $200,000
Credit sales $600,000
Total sales $800,000
Cost of goods sold $640,000
Ending Balance Beginning Balance
Accounts receivable $40,000 $36,000
Inventory $10,000 $6,000
Accounts payable $ 9,000 $ 5,000

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 13.1 (D) Putting It All together: The
Cash Conversion Cycle (continued)
Example 1 Answer
First, we calculate the average values of the 3 accounts:
Average A/R  ($36,000 + $40,000)/2 = $38,000
Average inventory  $(10000+6000)/2 = $8,000
Average A/P ($9 000 + $5,000)/2 = $7,000
Next, we calculate the turnover rates of each:

A/R Turnover = Credit Sales/Avg. A/R $600,000/$38,000 15.7895

Inventory Turnover = Cost of Goods Sold/Avg. Inv $640,000/$8,000
= 80
A/P Turnover = Cost of Goods Sold/Avg. A/P = $640,000/$7,000
= 91.43

Finally we calculate the collections cycle, the production cycle, and the
payment cycle by dividing each of the turnover rates into 365 days,
respectively.

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 13.1 (D) Putting It All together: The
Cash Conversion Cycle (continued)

Example 1 Answer (continued)

Collection cycle= 365/A/R Turnover365/15.7895 23.12 days

Production cycle = 365/Inv. Turnover365/80 4.56 days
Payment cycle = 365/A/P Turnover365/91.43 3.99 days

So the firm’s operation cycle = Collection cycle + Production cycle

= 23.12+4.56 = 27.68 days
Cash conversion cycle = Operating cycle – Payment cycle
= 27.68-3.99 23.69 days.
So on average, the firm has to finance its credit sales for
about 24 days.

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 13.2 Managing Accounts Receivable
and Setting Credit Policy

• The efficient management of accounts

receivable  critical step in shortening the
cash conversion cycle.

• Lax credit policy  defaults

Strict credit policy Lost sales

• Firms have to establish well-balanced credit

and collection policies to efficiently manage
working capital.

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 13.2 (A) Collecting Accounts
Receivable
• The timing of collecting payments from
customers is hardly uniform.
• A certain percentage of customers always
pay on time, while a small percentage is
always late.
• Firms have to analyze their historical
collection patterns and accordingly plan for
the future.

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 13.2 (B) Credit : A Two-Sided
Coin
• One firm’s accounts receivable is another firm’s
accounts payable.

• The cash conversion cycle decreases with a shortening

of the collection cycle but increases with a lengthening
of the payment cycle,

• If a firms shortens it collection cycle by tightening its

credit policy, its suppliers could do the same, which
would negate the effectiveness of the strategy.

• Firms must establish good credit policies regarding

screening, payment terms, and collecting of over-due
bills.

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 13.2 (C) Qualifying for credit

• Often depends on the customer’s

background, business potential, and
competitive pressures.

• There is usually a trade-off between paying

the high screening costs and the lost cash
flow due to defaults resulting from poor
screening.

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 13.2 (C) Qualifying for Credit
(continued)
Example 2: Evaluating credit screening cost. Go-Green
Golf Carts Inc. has developed an environmentally friendly golf
cart, which costs $2500 to produce and will sell for $4,000.
Market analysis shows that the firm will be able to sell 2000
carts per year, if it allows credit sales. However, there is a
chance that 1% of the customers may default.
If the firm does not offer credit terms, 40% of the sales will be
lost.
It has also been determined that if the firm offers credit only
to credit-worthy customers by screening the buyers, the
default rate will be zero, i.e. the 20 potential defaulters will be
screened in advance.
Should the firm proceed with credit sales and if so, should it
screen the clients and at what cost?

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 13.2 (C) Qualifying for Credit
(continued)
Example 2 Answer

Profit earned on all-cash sales= .6*2000*($1500)

$1,800,000
Profit earned on credit sales (no screen)
= ( .99*2000*1500) - (20*2500)$2,920,000

i.e 99% of 2000 customers will pay and provide a $1500

profit, while 1% of 2000 or 20 customers will default
causing a loss of $2500 each

Additional profit generated by granting no-screen credit

2,920,000-$1,800,000= $1,120,000

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 13.2 (C) Qualifying for Credit
(continued)
Example 2 Answer (continued)

Benefits of screening = 20 *$2500 = $50,000

Maximum cost per customer for screen = $50,000/2000 = $25

Let’s say the firm proceeds with the credit terms and successfully
screens out the 20 bad credit clients at a cost of $25 per screen

Profit = (1980*$1500) - $25*2000=$2,920,000the amount it would

earn if all 2000 sales were on credit and 20 customers defaulted.

If the credit screen costs more than $25 it would be better for
them to merely grant credit and hope that the default rate is
not >1%!!

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 Five Cs of Credit

• Character – willingness to meet financial

obligations
• Capacity – ability to meet financial
obligations out of operating cash flows
• Capital – financial reserves
• Collateral – assets pledged as security
• Conditions – general economic conditions
related to customer’s business

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17.20
 13.2 (D) Setting Payment Policy

• An important part of credit policy is to

determine how many days of free credit to
grant customers and whether or not to offer
discounts for paying early, and if so, how
much of a discount?
• Discounts, if high enough, tend to be
mutually beneficial, since the seller frees up
cash and the buyer pays less.

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 13.2 (D) Setting Payment Policy
(continued)
Example 3: Cost of foregoing cash
discounts.
Let’s say that a firm grants it customers credit on
terms of 1/10, net 45. You are one of the customers
who have an invoice due of $10,000. You have a line
of credit with your bank that is at the rate of 9% per
year on outstanding balances.
Should you avail of the discount and pay within 10
days or wait until the 45th day and make the full
$10,000 payment?
Terms are 1/10, net 45, meaning:
A 1% discount is available if paid within 10 days.

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 13.2 (D) Setting Payment Policy
(continued)
Example 3 Answer

If you pay within 10 days, you will owe $10,000*(.99)= $9900

If you pay by Day 45, you will owe $10,000
You benefit by $100 for a 35 day period.
If you could invest $9900 over a 35 day period and end up with
more than $10,000, you would be better off holding off the
payment and investing the money rather than taking the
discount.
The holding period return = $100/$9900 = 1.01% over a 35 day
period
The APR = HPR * 365/35= 1.01*10.428% 10.53%
The EAR = (1+HPR)365/n -1 = (1.0101)365/35-1 =11.05%
Since you can borrow at 9% per year, it would be better to
borrow the money, pay on Day 10, and take advantage of the
discount.

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 13.2 (D) Setting Payment Policy
(continued)
Example 3 Answer (continued)

Alternate method:
Calculate the APR and EAR implied by the discount being
offered using Equations 13.12 and 13.13 as follows:

APR = (1%/(1-1%)) * (365/days between payment days)

= (.01/.99)* (365/(45-10) .0101*10.428
.1053 or 10.53%

EAR = (1+ (.01/.99)365/35 -1 = (1.0101)10.428 – 1 = 11.05%

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 13.2 (E) Collecting Overdue
Debt
• A firm’s collection policy, involves sending
collection notices, taking court action, and
eventually writing off bad debts.
• The cost to the firm escalates at each step
 Firms should carefully establish and monitor
their credit policy involving:
– screening,
– payment terms, and
– collection procedures
• so as to maximize benefits while minimizing
costs.

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 13.3 The Float

• “Float,” the time it takes for a check to

clear, is of two types:
– Disbursement float is the time lag between
when a buyer writes a check to when the money
leaves his or her account.
– Collection float is the time lag between when a
seller deposits the check to when the funds are
received in the account.

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 13.3 The Float

• “Float,” the time it takes for a check to

clear, is of two types:
– Disbursement float is the time lag between
when a buyer writes a check to when the money
leaves his or her account.
– Collection float is the time lag between when a
seller deposits the check to when the funds are
received in the account.

Note: The collection float is part of the disbursement float, so if the seller or his
bank can speed up collection it will automatically shorten the disbursement float.

The collection float will automatically shorten the disbursement float in a

situation when the seller or his bank can speed up collection.

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 13.3 The Float (continued)

Figure 13.5 Disbursement and collection float.

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 13.3 (A) Speeding Up the
Collection (Shortening the Lag
Time)
• Firms attempt to speed up collections in a
variety of ways including:

– Lock boxes, which are post office boxes set up

at convenient locations to allow for quick pick up
and deposit of checks by the firm’s bank.

– Electronic fund transfers (EFT) which occur

directly from the buyer’s account. For example
by accepting debit cards.

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 13.3 (B) Slowing Down Payment
(Lengthening the Lag Time)
• Getting more difficult with the advent of
Check 21 (electronic clearing of checks
between banks) and acceptance of debit
cards.
• One method that continues to be popular,
though, is the wide-spread use of credit
cards which allows for a month long float.

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 Inventory Management

• Inventory can be a large percentage of a

firm’s assets
• Costs associated with carrying too much
inventory
• Costs associated with not carrying enough
inventory
• Inventory management tries to find the
optimal trade-off between carrying too much
inventory versus not enough

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17.31
 Types of Inventory

• Manufacturing firm
– Raw material – starting point in production
process
– Work-in-progress
– Finished goods – products ready to ship or sell
• Remember that one firm’s “raw material”
may be another company’s “finished good”
• Different types of inventory can vary
dramatically in terms of liquidity

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17.32
 Inventory Management

• Classify inventory by cost, demand and need

• Those items that have substantial shortage
costs should be maintained in larger
quantities than those with lower shortage
costs
• Generally maintain smaller quantities of
expensive items
• Maintain a substantial supply of less
expensive basic materials

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17.33
 Inventory Costs
• Carrying costs represent the total expenses incurred
to hold inventory over a certain period.
• – range from 20 – 40% of inventory value per year
– Storage and tracking
– Insurance and taxes
– Losses due to obsolescence, deterioration or
theft
– Opportunity cost of capital
• Ordering costs
– the ordering cost is the total of all expenses
involved in placing, receiving, and processing an
order.
• Consider both types of costs and minimize the total
cost
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17.34
 13.4 Inventory Management:
Carrying Costs and Ordering Costs
• Managing inventory essentially involves the balancing of carrying
costs (i.e. storage costs, handling costs, financing costs and costs
due to spoilage and obsolescence) against ordering costs (i.e.
delivery charges), which tend to offset each other.
• To keep carrying costs down requires more frequent orders of
smaller sizes, but could result in lost sales due to stock-outs.
• Fewer, larger orders, lowers ordering costs, but requires carrying
larger amounts of inventory.
• There are 4 cost-minimizing methods that firms can use to
manage inventories efficiently:
– The ABC inventory management model;
– Stocking redundant inventory;
– the Economic Order Quantity method; and
– the Just in Time approach.

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 13.4 (A) ABC Inventory
Management
Involves categorizing inventory into 3 types:
– Large dollar or critical items (A-type);
– Moderate dollar or essential items (B-type),
– Small-dollar or non-essential items (C-type).
Each type is monitored differently with respect to the
frequency of taking stock and re-ordering.
Table 13.1 Inventory Categories for Corporate Seasonings

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 13.4 (B) Redundant Inventory
Items
• Involves maintaining back-up inventory of
items that are currently not needed
frequently,but could be used in
emergencies.
• Avoid higher costs due to stoppages.

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 13.4 (C) Economic Order
Quantity
• Method to determine the optimal size of each order by
balancing ordering costs with carrying costs so as to minimize
the total cost of inventory.
• The Trade-off between Ordering Costs and Carrying
Costs: occurs because with larger order sizes, fewer orders
are needed, reducing delivery
costs, and the costs resulting Figure 13.7 Inventory costs.
from lost sales due to shortages.
However, higher levels of
inventory are held, thereby
increasing costs associated
with storage, handling,
spoilage and obsolescence.

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 13.4 (C-2) Measuring Ordering
Costs
• Involves multiplying the number of orders
placed per period by the cost of each order
and delivery, i.e.

Where OC = cost per order; S=annual sales;

and Q = order size.

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 13.4 (C-2) Measuring Ordering
Costs (continued)

Example 4: Measuring ordering cost.

Nigel Enterprises sells 1,000,000 copies per
year. Each order it places costs $40 for
shipping and handling. How will the total
annual ordering cost change if the order size
changes from 1000 copies per order to
10000 copies per order.

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 13.4 (C-2) Measuring Ordering
Costs (continued)
Example 4: Measuring ordering cost.
Nigel Enterprises sells 1,000,000 copies per year. Each order it
places costs $40 for shipping and handling. How will the total
annual ordering cost change if the order size changes from
1000 copies per order to 10000 copies per order.

Answer
At 1000 copies per order:
Total annual ordering cost = $40 X 1,000,000/1000 $40,000

At 10,000 copies per order:

Total annual ordering cost = $40 X 1,000,000/10,000 $4000
As order size increases, ordering costs decline due to fewer
orders

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 13.4 (C-3) Measuring Carrying
Costs
• Involves multiplying the carrying cost by the half
the order quantity, i.e.

• The model assumes that inventory is used up at a

constant rate each period so when it is at its half
way point a new order is received, meaning that on
average we are holding about half the inventory
each period.

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 13.4 (C-3) Measuring Carrying
Costs (continued)
Example 5: Measuring carrying cost.
Nigel Enterprises has determined that it costs them
$0.10 to hold one copy in inventory each period. How
much will the total carrying cost amount to with 1000
copies versus 10,000 copies being held in inventory.

Answer
With 1000 copies in inventory
Total annual carrying cost = $0.10* 1000/2 = $50
With 10,000 copies in inventory
Total annual carrying cost = $0.10*10,000/2 = $500
As order size increases carrying costs go up
proportionately.

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 13.4 (C-3) Measuring Carrying
Costs (continued)

To arrive at the optimal order quantity, we can use Equation

13.17

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 13.4 (C-3) Measuring Carrying
Costs (continued)
Example 6: Calculating EOQ.
With annual sales of 1,000,000 copies, carrying costs
amounting to $0.10 per copy held and order costs amounting
to $40 per order. What is Nigel Enterprises’ optimal order
size? Please verify that your answer is correct.

Answer
S = 1,000,000; OC = $40; CC = $0.10
EOQ = [(2*1000000*$40)/0.1]1/2= 28, 285
(rounded to nearest whole number)
With order size = 28,285,
Total order cost = (1,000,000/28285)*$40 = $1,414.2
Total carrying cost = 28,285/2*0.1= $1414.2
Total inventory cost = $2,828.4

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 13.4 (C-3) Measuring Carrying
Costs (continued)
Example 6 Answer (continued)

Verification:
With Q = 28,000 OC = (1,000,000/28,000)*$40
$1428.6
CC28000/2*.11400
Total cost 2828.6>$2828.4
With Q = 29,000 OC= 1,000,000/29,000)*40
1379.31
CC1450
Total cost = $2,829.31>$2,828.4

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 13.4 (C-4) Reorder Point and
Safety Stock
Inventory gets used up every day lead time necessary
for additional supplies  firms must determine a reorder
point  to avoid a stock-out.
The reorder point = daily usage * days of lead time
Once the inventory hits the re-order point, the next order
is placed so that by time it is delivered, the firm would
be just about out of inventory.

An additional protection measure is to build in some

safety stock or buffer so as to be covered in case of
delivery delays as follows:

Average inventory = EOQ/2 + safety stock

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 13.4 (C-4) Reorder Point and
Safety Stock (continued)

Figure 13.6 Inventory flow.

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 13.4 (C-4) Reorder Point and
Safety Stock (continued)
Example 7: Measuring re-order point and safety stock.
Calculate Nigel Enterprises’ re-order point and safety stock assuming that
deliveries take 4 days on average with a possibility of 2 day delays
sometimes.

Answer
EOQ = 28,285; daily usage rate = 1,000,000/365 2740

Reorder point = 4*2740 = 10,960 (without safety stock)

With safety stock built in we calculate average inventory as

Average inventory = EOQ/2 + safety stock

Safety stock = 2 days usage = 2*2740 = 5480

So Nigel Enterprises should reorder when the inventory drops to

10,960 + 5480 16,440 copies.

copies

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 13.4 (C-5) Just in Time

• An inventory management system which

tries to keep inventory at a minimum by
following lean manufacturing practices, i.e.
producing only what is required, when it is
required and keeping finished goods in
storage for as little time as possible.
• JIT inventory management, if practiced
successfully would eliminate waste and
improve productivity significantly

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 13.5 The Effect of Working Capital
on Capital Budgeting

• Inventories and Daily Operations: For

capital budgeting the initial investment
required for working capital i.e. inventory
and accounts receivable, as part of cash
outflow at time 0.
• Also, need to account for:
– Periodic fluctuations in working capital, and
– Cash inflow from recovery of working capital at
the end of a project’s useful life i.e. drawing
down on the inventory and collecting the
receivables

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13-52 © 2013 Pearson Education, Inc. All rights reserved.
 Additional Problems with Answers
Problem 1
Measuring Cash Conversion Cycle.
John Gray is really concerned that his company’s working capital is not being
managed efficiently. He decides to take a look at the firm’s operating and cash
conversion cycles to see what’s going on. Using the data provided below, help John
measure his firm’s collection, production, payment, operating, and cash conversion
cycles respectively.

Cash sales $350,000

Credit sales $600,000
Total sales $950,000
Cost of goods sold $600,000
Ending Balance Beginning Balance
Accounts receivable $45,000 $32,000
Inventory $22,000 $9,000
Accounts payable $6,000 $5,000

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 Additional Problems with Answers
Problem 1 (Answer)
First, we calculate the average values of the 3 accounts:
Average A/R ($45,000 + $32,000)/2 = $38,500
Average inventory$(22,000+9000)/2 = $15,500
Average A/P ($6,000 + $5,000)/2 = $5,500
Next, we calculate the turnover rates of each
A/R Turnover = Credit Sales/Avg. A/R $600,000/$38,500 15.58
Inventory Turnover = Cost of Goods Sold/Avg. Inv  $600,000/$15,500
= 38.71
A/P Turnover = Cost of Goods Sold/Avg. A/P = $600,000/$5,500 = 109.09
Finally we calculate the collections cycle, the production cycle, and the
payment cycle by dividing each of the turnover rates into 365 days,
respectively.

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 Additional Problems with Answers
Problem 1 (Answer) (continued)

• Collection cycle = 365/A/R Turnover 365/15.58

23.43 days
• Production cycle = 365/Inv. Turnover365/38.71
9.43 days
• Payment cycle = 365/A/PTurnover365 /
``````````````````````````109.093.35 days
• So the firm’s operation cycle = Collection cycle + Production
cycle =23.43+9.43 = 32.86 days

• Cash conversion cycle = Operating cycle – payment cycle =

32.86-3.35 29.51 days. So on average, the firm has to
finance its credit sales for about 30 days.

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13-56 © 2013 Pearson Education, Inc. All rights reserved.
 Additional Problems with Answers
Problem 2
Credit screening cost-benefit analysis:
Mid-West Marine Products currently sells its light-weight boat
lifts for $3,500 each. The unit cost of each lift is $2,600.
On average, the firm sells 2000 lifts a year on a cash basis.
Consumer Credit Check is offering Mid-West a credit screening
system at the rate of $25 per screen, and assures them that
the system will be at least 99% accurate. Mid-West’s research
indicates that if they offer credit terms, it will boost their sales
by 40% per year. They have also learned that the typical
default rate in their industry is around 3%.
a) Should Mid-West start offering credit terms?
b) If they do offer credit, should they do so with or without
CCC’s credit screening services? Please explain.

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 Additional Problems with Answers
Problem 2 (Answer)

Current profit (all-cash sales) = 2,000*($3,500-$2,600) = $1,800,000

With credit terms…Unit sales = 2,000*(1.4) = 2800 lifts
Profit (with credit and no screening)
= $900*2,800*.95 - .03 * 2,800* ($2,600)
$2,394,000-218,400=$2,175,600
Profit (with credit screening) = ($900*2,800*.99)-(.01*2800*($2,600))
=$2,494,800-$72,800$2,422,000
Increase in profit from screen = $2,422,000 - $2,175,600 = $246,400
Maximum cost of screening per customer = $246,600/$2,800 = $88
At $35 per screen, it is definitely worthwhile to offer credit terms with
screening service provided by Consumer Credit Check.

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 Additional Problems with Answers
Problem 3

• Cost of foregoing cash discounts: Your raw

material supplier has been accepting payments
on 30 day terms with no interest penalty.
• Recently, you received an invoice which stated
that the supplier would offer terms of 1/10, net
30.
• You have a line of credit with your bank at an
EAR of 14.5% per year on outstanding loans.
• Should you accept the discount offer? Please
explain why or why not.

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 Additional Problems with Answers
Problem 3 (Answer)

At terms of 1/10, net 30 you will get 1% off

and be allowed to pay in 10 days, otherwise
the full amount is due in 30 days
HPR = .01/.99 = 1.0101%
EAR = (1+HPR)365/20 – 1
= (1.0101)18.25 -1
= 20.129%
Since you are able to borrow at 14.5%, you
are better off taking the cash discount and
effectively earning an EAR of 20.129%

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 Additional Problems with Answers
Problem 4

Economic order quantity (EOQ). The Always-

Stocked Party Store wants to stay true to its
name, especially since the “Out-to-Get-You” Party
store is opening up very close by. One of their
main sellers, the Mega-Keg, costs $2 to stock and
accounts for sales of 3600 kegs per year.
Each order for kegs cost roughly $200 and takes
on average 5 days to be delivered, with the
possibility of 2 day delays.
a) What is the optimal order size for Mega-Kegs?
b) At what point should the kegs be re-ordered to
assure that the store never runs out?

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 Additional Problems with Answers
Problem 4 (Answer)

EOQ = [2 x 3600 x $200 / $2]1/2 = 849

EOQ = 849; daily usage rate = 3600/36510

Reorder point = 5*10 = 50 (without safety stock)

Safety stock = 2 days usage = 2*10 = 20

So the store should reorder when the inventory drops to

50+20 70 kegs.

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 FIGURE 13.4 Invoice payment options,
amounts, and dates for Peak Construction’s
bill from Space Lumber Company

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