Financial Management Individual Work 1 Week 8 - Essay Example

Finance and accounting a. Inventory supervision is perilous to the financial achievement of most firms. If inadequate portfolios arecarried, a firm will lose sales. Equally, if surplus inventories are conceded, a firm will incur advanced costs than required. b. The EOQ model requires the following axioms:The inventory usage is constant over a period of time.All the variable values are known and constant overtimeThe ordering cost per order is constant and therefore the company pays irrespective of the number of orders.

The carrying cost change proportionally to the level of inventory.c. The total inventory costs = total carrying cost + total ordering costs= CP (Q/20 + F (S/Q) WHERE C is annual carrying % of inventory value, P is purchase price per unit, Q is units in each order, F is fixed cost, S is units used in a year (Krajewski et al., 2013).(C*P)/2 = (F*S)/Q^2Q^2 = 2 (F*S)/(C*P)Q = EOQ = SQRT [2(FS)/(C*P)]d. EOQ = SQRT{2(F*S)/(C*P)SQRT {2*1000*5000)/ (20%*200)= SQRT (250000) = 500 units of microchipThe total inventory cost if EOQ is ordered.

TIC = CP (Q/2) + F(S/Q)20%*200*(500/2) + 1000 (5000/500) = $20000e. 400 unitsTotal inventory cost = CP (Q/2) + F(S/Q)0.2 (200)*(400/2) + 1000 (5000/400)$(8000+ 12500) = $20500Additional cost $(20500- 20000) = $500600 units The total inventory cost = 20 %( 200)*(600/2) + 1000(5000/600)= $(12000 + 8333) = $20333Additional cost incurred $(20333 – 20000) = $333f. With the annual usage of 5000 units, the weekly usage rate can be computed as (5000/52) which is approximately 96 units. If the lead time is 2 weeks for example, then the Webster must reorder 2(96) 192 units.

So after 2 weeks the new order of 500 chips is arrived.g. Two ways are involved to analyze the safety stocks on TIC. The TIC is $20000. The cost of carrying 200 units as addition, the CP is 20%(200)*200 = $800This means that TIC increased by $800 therefore, $(20000+ 800) = $2800Another approach is to take the safety stock 200 + (500/2) = 450 unitsTIC = 20 %( 200)*(450) + 1000(5000/500)$(18000 + 10000) $2800From the above calculations, Webster still reorders 192 units. Adding 200 safety units we get 392units.

Expected delivery time is 2 weeks hence (392/2) 196 units per week. If the usage remains constant, then the Webster could operate at 4 weeks (392/4) when waiting for delivery of each order.h. The discount has a sole effect of affecting the operating inventory and has no effect to the safety inventory stock. The Webster TIC is $20000. So an increase of 1000 units amounts to TIC = CP (Q/2) + F(S/Q) = 20 %( 198)*(100/2) + 1000(5000/1000) = $(19800 + 50000) = $24800It should be noted the discount has reduced the unit price.

The TIC IS $24800 so if the Webster now orders 1000 units at a time, the incremental annual cost become $(24800-20000) = $4800. The 1 per cent on each unit of chip will amount to savings of 0.01$(200)*(5000) = 10000 dollars (Tajbakhsh, 2007). The effective savings is $(10000-4800) = $5200 if the firm accepts the discount which is advised to take.i. The EOQ model can be used at different short constant kind of situations taking into account that the assumptions made in the derivation of the model calls for constant variables.

It can therefore be used using the annual rates of each period.j. 1. The just in time procedures are used to majorly reduce the inventories. So if used, it will remove the necessity for EOQ model.2. Air freight is known for the shortening of delivery time and will obviate the necessity of safety stock and will not affect the EOQ3. Inventory systems that are computerized will enable the company in keeping track of its existing stock. This is of vital importance as it reduces safety stocks though seem not to affect the EOQ4.

The manufacturing trend is skewed to flexibility of designed plants, which give a go ahead in production without incurring high costs of setting up. This immensely reduce inventory holding of final goods. k. Using the EOQ model EOQ = SQRT {2F*S)/(C*P)}In this case, F is 32 S = $(12*100000) = $1200000 needed for every fiscal year. The carrying cost is 7% per year. EOQ = C* = SQRT {2(32)*(1200000)/0.07} = $33123Webster has an obligation to liquidate about $33123 chunks which can translate to 1200000/33123 = 36 times a year (Muckstadt & Sapra, 2010).

Calculating for each week, we get 52/26 = 1.44 ReferencesKrajewski, L. J., Ritzman, L. P., & Malhotra, M. K. (2013). Operations management: Processes and supply chains (3rd ed.). Upper Saddle River, N.J: Pearson. Muckstadt, J. A., & Sapra, A. (2010). Principles of inventory management: When you are down to four, order more (3rd ed.). New York: Springer. Tajbakhsh, M. M. (2007). Inventory management and sourcing decisions in the presence of upstream uncertainty (2nd ed.).