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Inventory Management and Cash Budget

The document discusses financial management and working capital management topics including: 1. Calculating the economic order quantity, number of orders per year, and time between orders for an inventory item with given annual demand, ordering costs, and carrying costs. 2. Determining the economic order quantity and minimum total cost for an inventory item when the supplier offers quantity discounts. 3. Computing the economic order quantity and total inventory carrying and ordering costs when placing multiple orders of equal size for another inventory item. 4. Preparing a cash budget for a company given opening cash balance, expected sales, asset acquisitions, loan receipt, dividend payment, credit terms, and sales commission details.

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Rashi Mehta
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173 views3 pages

Inventory Management and Cash Budget

The document discusses financial management and working capital management topics including: 1. Calculating the economic order quantity, number of orders per year, and time between orders for an inventory item with given annual demand, ordering costs, and carrying costs. 2. Determining the economic order quantity and minimum total cost for an inventory item when the supplier offers quantity discounts. 3. Computing the economic order quantity and total inventory carrying and ordering costs when placing multiple orders of equal size for another inventory item. 4. Preparing a cash budget for a company given opening cash balance, expected sales, asset acquisitions, loan receipt, dividend payment, credit terms, and sales commission details.

Uploaded by

Rashi Mehta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Financial Management (FM) / Working Capital Management (Inventory Management and Cash Budget)

1. The finance department of Prashant Textile Corporation gathered the following information:
(i) The carrying costs per unit of inventory are Rs. 10.
(ii) The fixed costs per order are Rs.20.
(iii) The number of units required is 30, 000 per year.
(iv) The variable costs per unit ordered are Rs.2.
(v) The purchase cost price per unit is Rs.30.
Determine the economic order quantity (EOQ), total number of orders in a year, and the time-gap
between two orders.
Solution:
Holding Cost: Rs.10
Ordering Cost: Rs. 20
Annual Demand: 30,000
Cost Per Unit = Fixed Purchase Price + Variable Costs = 30 + 2 = Rs. 32

a.
Q opt =
√ √
2 DS
H
=
2(30000 )20
10 = 346.41 → 347

D 347¿
=30000¿ ¿
b. Total Number of Orders = Q ¿ = 86.46
c. Time Gap Between 2 Orders: Total number of days in a year / No. of orders in a year
= 365 / 86.46 = 4.22 days.

2. Modern Enterprises requires 90,000 units of a certain item annually. It costs Rs. `3 per unit.
The cost per purchase order is Rs. 300 and the inventory carrying cost is 20 per cent per year.
(a) What is the Economic Order Quantity, if there is no quantity discount?
(b) What should the fi rm do if the supplier offers discounts as below, viz
Order Quantity Discount (%)
4,500–5,999 2
6,000 and above 3
Solution:

Note: EOQ = √
2 DS
iC

= √
2 X 90000 X 300
0 .20∗3 = 9486.83
Therefore, calculate total cost at Q=4500, C= 3 – (0.02*3) = 2.94,
D Q 90000 4500
TC Q =4500 ,C= 2. 94 =DC+ S+ iC =90000(2 .94 )+ 300+ (.20 )2 . 94
Q 2 4500 2 = 277215
D Q 90000 6000
TC Q =6000 , C=2 . 91=DC+ S + iC=90000 (2. 91)+ 300+ (. 20)2. 91
Q 2 6000 2 = 275130
The best order size is 6,000 units at a cost of Rs. 2.91.
3. Cheran Corporation requires 2,000 units of a certain item per year. The purchase price per unit is Rs. 30,
the carrying cost of inventory is 25 per cent of the inventory value, and the fixed cost per order is Rs.
1,000.
(a) Determine the economic order quantity.
(b) What will be the total cost of carrying and ordering inventories when 4 orders of equal size are
placed?
Solution:
Ordering Cost: Rs. 1000
Annual Demand: 2,000
Holding Cost: iC
Cost Per Unit = Rs. 30
Holding Cost: iC = 0.25*30 = 7.5

a.
Qopt =
√ √
2 DS
iC
=
2(2000 )1000
0 . 25∗30 = → 730
b. Ordering Cost if there are 4 orders of equal size Q = D/4 = 2000 / 4 = 500
D 2000
S= (1000 )
Ordering cost = Q 500 = 4000
Q 500
H= (0 . 25∗30)
c. Holding cost = 2 2 = 1875
D Q 2000 500
TCQ =500, C=30 =DC+ S+ iC=2000(30 )+ 1000+ (.20 )30
d. Total Cost = Q 2 500 2
= 60000 + 4000 + 1875 = 65875

4. From the information and the assumption that the cash balance in hand on 1 January 20X1 is Rs. 72,500,
prepare a cash budget. Assume that 50 per cent of total sales are cash sales. Assets are to be acquired in
the months of February and April. Therefore, provisions should be made for the payment of Rs. 8,000
and Rs. 25,000 for the same. An application has been made to the bank for the grant of a loan of Rs.
30,000 and it is hoped that the loan amount will be received in the month of May. It is anticipated that a
dividend of Rs. 35,000 will be paid in June. Debtors are allowed one month’s credit. Creditors for
materials purchased and overheads grant one month’s credit. Sales commission at 3 per cent on sales is
paid to the salesman each month.
Solution:

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