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# FIN622 Assign#1 Fall 2013

PROBLEM # 1: ( 10 + 2 + 3 = 15 Marks )
Kahani Ghar, a local company, mainly deals in the business of children storybooks. The company observes a stable demand for the storybooks so it keeps on replenishing its inventory by placing order(s) for more storybooks from the publisher whenever there is an inventory shortage. The company is planning to buy 400,000 storybooks in the coming year for which it can place a single order or multiple orders as provided in the following table. Each order would cost Rs. 100 and the annual carrying cost of the inventory would be Rs. 0.50 per storybook. Average inventory over theyear would be half of the order size so the carrying costs would be calculated accordingly.
Required:
a) Fill in the following table by keeping above information into consideration.

b) Which order should be placed by Kahani Ghar according to the table and why?
PROBLEM # 2: ( 4 + 1 = 5 Marks )
ABC Inc. mainly deals in selling goods on credit and the company’s average collection period is 40 days. The company is recently considering two options regarding its terms of credit. First option includes terms of 3/10 net 40 with an estimation that 60% of the customers will pay within 10 days whereas remaining will pay after 10 days. Second option includes terms of 3/15 net 40 days with an estimation that 40% of the customers will pay within 15 days whereas remaining will pay after 15
days.
Required:
a) What will be the average collection period of ABC Inc. in both options?
b) Which option is more suitable for the company (ignoring the cost of discounts) and why?

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### Replies to This Discussion

We can determine the ordering cost by calculating the number of orders in a year, and multiply this by the cost of each order.  To determine the number of orders we simply divide the total demand (D) of units per year by Q, the size of each inventory order.

D=Total demand (units)
Q=Inventory order size (quantity)

We then multiply this amount by the fixed cost per order (F), to determine the ordering cost.

The total inventory cost for a year for a business is simply the sum of the carrying cost and the ordering cost.  The total inventory cost formula is below, and the total inventory cost calculator can be found on this website.

C=Carrying cost per unit of inventory
Q=Inventory order size (quantity)
D=Total demand (units)
F=Fixed cost per order

This total inventory cost value can be expressed graphically, and will have a minimum value.  Using calculus to determine the minimum point, where the slope equals zero, will provide us with the optimal order quantity to reduce total inventory cost over the year.  This is known as the Economic Order Quantity.

##### EOQ Economic Order Quantity Formula

plz koi tu solution send ker day

total demand kya hogee?

tehrim itne sarey formulas bta diye apne...lykn total demand ka nai pta

just 400,000

mujhy pata tha bas confirm karna tha

for the solution of q no.2 Refer to Lec#31 page 115

See this example

ABC Co. has an average collection period of 60 days. Total credit sales for the year were \$3,000,000. What is the balance in accounts receivable at year-end?

Solution

\$500,000
to answer it - take total sales divided by 365 to get avg day's sales

3,000,000 / 365 = \$8219

then take avg days sales and multiply by average collection days

8219 x 60 = \$493,150. Closest answer to this is C.

Our main purpose here discussion not just Solution

We are here with you hands in hands to facilitate your learning and do not appreciate the idea of copying or replicating solutions.

EOQ=

http://www.ultimatecalculators.com/economic_order_quantity_calculat...

Average Inventory = (Beginning Inventory + Ending Inventory) /2

Average Inventory = (Beginning Inventory + Ending Inventory) /2

Ordering Costs = Order cost * No. of order

Carrying Costs = Carrying cost * No. of books

Total Costs = Ordering cost + Carrying cost

a)      Which order should be placed by Kahani Ghar according to the table and why?

in this we should choose whose cost is minimize and

In other words, economic order quantity is that size of quantity of the order which gives maximum economy in purchasing any material and ultimately contributes towards maintaining the material at the optimum level and minimum cost.

we should also discuse the reason for choosing this.

In part C we give the calculation of order which i choose in the part B. for example

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