Formulae

Question 1

EOQ purpose

Answer 1

To minimise ordering and holding costs

Question 2

Total cost of inventory =

Answer 2

Ordering + holding + purchase

Co/Q * D + Ch*Q/2 + P * D

Question 3

What does Q equal?

Answer 3

EOQ

Question 4

Assumptions of EOQ?

Answer 4

Constant & known
Holding 1 unit per year (average)
No lead time
No discounts

Question 5

If there is a discount, what would change in total cost of investory

Answer 5

P and Q

Purchase cost and EOQ

Question 6

Baumol model (formula same as EOQ) - what does Co, D and CH stand for?

Answer 6

Co = transaction costs
D = annual demand
Ch = interest opportunity cost

Question 7

What is the purpose of Baumol model?

Answer 7

How much cash to transfer to minimise costs

Question 8

Assumptions of Baumol model?

Answer 8

Constant demand cash

All components known

Question 9

Miller-orr model purpose?

Answer 9

Optimum level of cash to hold (minimise the opportunity costs

Question 10

Miller-orr = Spread = 3(3/4 * transaction cost * vairance of cash flows/ Interest rate)/1/3

Return point = Lower Limit + (1/3 * Spread)

Model lets you fluctuate between upper and lower limit

Answer 10

Upper Limit = Invest in positive NPV
Lower Limit = Sell liquid securities

Return point = optimum level of cash to hold

Question 11

Annual cost of discount in %?

Answer 11

(1+discount/amount left to pay)no of periods -1