Blog: Fin622 Assignment No. 2 solution

“Corporate Finance (FIN622) ”

Assignment No. 02 

Marks: 15

Question:

SNT Company has been dealing in the business of books for five years. The company faces steady demand for the books. So, it replenishes the supply by placing an order for more books from the publisher whenever there is inventory shortage. The company is planning to buy 200,000 books over the coming year. Each order that it places costs Rs. 75 and the annual carrying cost of the inventory is Rs. 0.10 per book. The company can place either a single order or multiple orders as provided in the following table. Average inventory over the year would be half of the order size and therefore carrying costs would be calculated accordingly.

(a) Fill in the table by keeping above information into consideration. (10)

Order Size

Orders per year

Average Inventory

Ordering Costs

Carrying Costs

Total Costs

200,000

100,000

50,000

20,000

10,000

(b) Which order should be placed by SNT Company according to the table and why? (2)

(c) Calculate Economic Order Quantity. Is your answer consistent with your findings in part (b)?

Schedule

Opening Date and Time

June 09, 2011 At 12:00 A.M. (Mid-Night)

Due Date and Time

June 14, 2011 At 11:59 P.M. (Mid-Night)


Solution:


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