Chapter 28
Advanced Issues in Cash Management and Inventory
Control
ANSWERS TO END-OF-CHAPTER QUESTIONS
28-1 a. The Baumol model is a model for establishing the firm’s target cash balance that
closely resembles the EOQ model used for inventory. The model assumes (1) that the
b. Carrying costs are the costs of carrying inventory. Ordering costs are the costs of
c. The Economic Ordering Quantity (EOQ) is the order quantity that minimizes the
d. The reorder point is the inventory level at which a new order is placed. Safety stock
e. The red line method is a technique for inventory control, as is the two-bin method.
Computerized inventory control systems are just what the name implies. In the red
f. Just-in-time systems refer to receiving inventories just as they are needed. Firms that
28-2 a. Our suppliers switch from delivering –
by train to air freight. (a below)
b. We change from producing just in time to
c. Competition in the markets in which 0
(a) Lower safety stock will be required because delivery time is shortened.
(c) On the one hand, the need to stay competitive may require large inventories, but
28-3 When money is tight, interest rates are generally high. This means that near-cash assets
28-4 a. Better synchronization of cash inflows and outflows would allow the firm to keep its
c. A reduction in the portfolio of U.S. Treasury bills (marketable securities) would cause
d. An overdraft system will enable the firm to hold less cash.
e. If the amount borrowed equals the increase in check-writing, the target cash balance
f. The firm will tend to hold more Treasury bills, and the target cash balance will tend to
decline.
SOLUTIONS TO END-OF-CHAPTER PROBLEMS
28-1 a. EOQ =
)P)(C(
)S)(F(2
=
)5.1)(2.0(
)000,90)(15($2
=
000,000,9
= 3,000 bags per order.
b. The maximum inventory, which is on hand immediately after a new order is received,
is 4,000 bags (3,000 + 1,000 safety stock). At $1.50 per bag the dollar cost is $6,000.
If it maintained an average balance of $50,000, this would mean transfers of
SOLUTIONS TO SPREADSHEET PROBLEMS
28-3 The detailed solution for the spreadsheet problem, Ch28 P03 Build a Model
Solution.xlsx, is available on the textbook’s Web site.