EOQ = 2SO

EOQ (Economic Order Quanitity) is the optimal level of inventory a company should order

S = Annual sales in units

O = Order cost in $ per order
C = Carrying cost in $ per unit

+
Order Carryinig

TC = SO CQ
Q 2
TC = Total Cost of Ordering and Carrying Inventory
S = Annual Sales in units
O = Order cost in $ per order
Q = Economic Order Quantity
C = Carrying cost in $ per unit
ny should order

Annual Sales / # units we order each time

We will get the number of orders we place

EOQ / 2 it gives us average inventory

Debbie downer sells coal to Santa claus to use in his holiday bags. Debbie sells 50,000 units of coal a year and has
an ordering cost of $15.00 per order. Carrying costs are $1.50 per unit.

Sales = 50,000 units

O = $15.00 per order
C= $1.50 per unit

a) What is the EOQ

b) How Many Orders will be placed in a year:
EOQ = 2(S)(O)
C If you need 50,000 units in a year and order 1000 each time then the

# of orders = Sales
EOQ = 2*50000*15 EOQ
1.5

# of orders = 50000
1000
EOQ = 1,500,000
1.5 # of orders = 50

We will order 50 times per year

EOQ = 1,000,000

EOQ = 1000 d) What is the total cost of ordering and carrying inventory:
Ordering Carrying

TC = SO
Q + CQ
2

TC = 50000*15
1000 + 1.50*1000
2

TC = 750000
1000 + 1500
2

TC = 750 + 750

TC = 1500
nits of coal a year and has

c) What is the average inventory:

er 1000 each time then the answer is? Average inventory = EOQ
2
+ SS

Average inventory = 1000

2
+ 0

Average inventory = 500

arrying inventory:

The shaded areas represent the number of orders and the average inventory:

When you multiply the number of orders by the order cost you get the total cost of ordering 750
When you multiply the average inventory by the cost of carrying each unit you get the total cost of carrying inventory

If you add those two numbers together you get TC or the total cost of ordering and carrying the inventory

TC
100 orders 1500
qty of 500 375
1875

25 orders 375
2000 1500
1875
of carrying inventory 750
Debbie downer sells coal to Santa claus to use in his holiday bags. Debbie sells 50,000 units of coal a year and has
an ordering cost of $15.00 per order. Carrying costs are $1.50 per order.

Sales = 50,000 units

O = $15.00 per order
C= $1.50 per unit

a) What is the EOQ

b) How Many Orders will be placed in a year:
EOQ = 2(S)(O)
C If you need 72,000 units in a year and order 600 each time then the a

# of orders = Sales
EOQ = 2(50,000)(15) EOQ
1.5

# of orders = 50000
1000
EOQ = 1,500,000
1.5 # of orders = 50

We will order 120 times per year

EOQ = 1,000,000

EOQ = 1000 d) What is the total cost of ordering and carrying inventory:

TC = SO
Q + CQ
2

TC = 50,000*15
1000 + 1.50 * 1000
2

TC = 750000
1000 + 1500
2

TC = 750 + 750

TC = 1500
nits of coal a year and has

c) What is the average inventory:

er 600 each time then the answer is? Average inventory = EOQ
2
+ SS

Average inventory = 1000

2
+ 0

Average inventory = 500

arrying inventory:

The saded areas represent the number of orders and the average inventory:

When you multiply the number of orders by the order cost you get the total cost of ordering 120*6 = $720
When you multiply the average inventory by the cost of carrying each unit you get the total cost of carrying inventory

If you add those two numbers together you get TC or the total cost of ordering and carrying the inventory
120*6 = $720
of carrying inventory
Page 256 Problem 30

Current terms 2/10 net 30

Annual sales of 400,000 units
Cash sales are 10% of sales (qualify for discount)
65% pay on the 10th (qualify for the discount)
25% pay on average on the 40th day (No discount)
Sales priced at $24
VC is $21 per unit
Bad debt is 1.5% credit sales

Current Plan

Sales: $ 9,600,000
VC $ 8,400,000
CM $ 1,200,000 $ 1,200,000

Opp cost of A/R

65% of customers that pay on 10th day

Annual Sales $ 6,240,000

Daily sales $ 17,096
Avg A/R $ 170,959
Opp Cost $ 22,225 $ (22,225)

25% of customers that pay on 40th day

Annual Sales $ 2,400,000

Daily Sales $ 6,575
Avg A/R $ 263,014
Opp cost $ 34,192 $ (34,192)

Discount
Cash sales $ 960,000
10 day payers $ 6,240,000
$ 7,200,000
Discount exp = 7,200,000*.02 $ (144,000)

Bad Debt
90% of sales * 1.5%
$ 129,600 $ (129,600)

Net Income $ 869,984

Proposed Plan Income
Original Plan Income
Net benefit to new plan

Decision is to change to the new plan as our income is $21

New policy is 2/10 net 60
Expect sales to increase by 12%
Cash sales are 10% of sales (qualify for discount)
25% customers pay on the 10th day (qualify for discount)
65% customers pay on the 70th day (No discount)
Vc stay at $21 per unit
Bad debt to 2% of credit sales

Proposed Plan

Sales: $ 10,752,000 $ 10,752,000.00

VC $ 9,408,000
CM $ 1,344,000 $ 1,344,000

Opp cost of A/R

25% of customers pay on the 10th day

Annual Sales $ 2,688,000

Daily Sales $ 7,364
Avg A/R $ 73,644
Opp Cost $ 9,574 $ (9,574)

65% of customers that pay on 70th day

Annual Sales $ 6,988,800

Daily Sales $ 19,147
Avg A/R $ 1,340,318
Opp Cost $ 174,241 $ (174,241)

Discount
Cash sales $ 1,075,200
10 day payers $ 2,688,000
$ 3,763,200
Discount exp = 3,763,200*.02 $ (75,264)

Bad Debt
90% of sales * 2.0%
$ 9,676,800 $ (193,536)

Net Income $ 891,385

 $ 891,385
$ 869,984
$ 21,401

the new plan as our income is $21,401 higher

Opp cost 13%

Sales in units
Sales increased by 12%
448000 units sold
 Velocity inc and Speed Corp are competitors in the internet support industry.
Both orginazations are able to earn a return on assets of 12% and have a tax rate of 30%

Velocity has $500,000 of debt at 12% interest and 200,000 common shares with a book value of $1,000,0
Speed Corp has $1,000,000 of debt at 12% and 100,000 common shares with a book value of $500,000

Compute the EPS for both organizations:

Velocity Speed Velocity

EBIT $ 180,000 $ 180,000 EBIT $ 150,000
Int $ 60,000 $ 120,000 Int $ 60,000
EBT $ 120,000 $ 60,000 EBT $ 90,000
Tax $ 36,000 $ 18,000 Tax $ 27,000
Eat $ 84,000 $ 42,000 Eat $ 63,000

EPS $ 0.42 $ 0.42 EPS $ 0.32

Page 211 # 16
rate Int St rates 8%
ST Temp 1000000 0.08 60000 Lt rates 13%
LT Perm 2000000 0.13 260000
LT Cap 1200000 0.13 156000
Total 476000
ax rate of 30%

s with a book value of $1,000,000 Calculate EBIT:

th a book value of $500,000 How many assets do each company have?
Velocity: Conservative
Debt $ 500,000
Equity $ 1,000,000
Speed Total Assets $ 1,500,000
$ 150,000 ROA $ 180,000
$ 120,000
$ 30,000 Velocity Int $ 60,000.00
$ 9,000 Speed Int $ 120,000.00
$ 21,000

$ 0.21

EBIT $ 996,000 Jan

Int $ (476,000) Feb
EBT $ 520,000 Mar
Tax $ (156,000) Apr
EAT $ 364,000 May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
 Speed Aggressive / Riskier bc they use more leverage (in particular financial leverage)
$ 1,000,000
$ 500,000
$ 1,500,000
$ 180,000

Velocity Shares 200000

Speed Shares 100000

Temp Perm Cap

1000000 20000000 1200000
1000000 20000000 1200000
1000000 20000000 1200000
1000000 20000000 1200000
1000000 20000000 1200000
1000000 20000000 1200000
1000000 20000000 1200000
1000000 20000000 1200000
1000000 20000000 1200000
0 20000000 1200000
0 20000000 1200000
0 20000000 1200000
ancial leverage)
 Velocity inc and Speed Corp are competitors in the internet support industry.
Both orginazations are able to earn a return on assets of 12% and have a tax rate of 30%

Velocity has $500,000 of debt at 12% interest and 200,000 common shares with a book value of $1,000,0
Speed Corp has $1,000,000 of debt at 12% and 100,000 common shares with a book value of $500,000

Compute the EPS for both organizations:

Velocity Speed
EBIT $ 180,000 $ 180,000
Int $ (60,000) $ (120,000)
EBT $ 120,000 $ 60,000
Tax $ (36,000) $ 18,000
Eat $ 84,000 $ 78,000

EPS $ 0.42 $ 0.78

Page 211 # 16
Int St rates 8%
ST Temp 1000000 80000 Lt rates 13%
LT Perm 2000000 260000
LT Cap 1200000 156000
Total 4200000 496000
tax rate of 30%

es with a book value of $1,000,000 Calculate EBIT:

with a book value of $500,000 Original Debt $500,000
Original Equity $1,000,000
We know Total assets are $1,500,000
ROA = 12%
ROA = $ 180,000.00

Velocity Int 60000

Speed Int 120000

EBIT $ 996,000
Int $ (496,000)
EBT $ 500,000
Tax $ (150,000)
EAT $ 350,000
Velocity Shares 200000
Speed Shares 100000