Question

You may attempt this question 3 more times for credit. AIA Inc. is looking to manage its cash position using the EOQ model. The company is consuming cash at the rate of $6800 per day, and is open for business 365 days in the year. Each tine the firm sells securities to obtain the cash, it costs them $250. The interest rate is 2.10%. What are the total costs (annual storage costs +annual order costs) associated with the EOQ? *Place your answer to the nearest dollar without including a dollar sign or commas

Answer 1

Annual Cash consumption = $6,800 × 365

= $2,482,000

Optimum Level fo cash = SQRT [ 2 × $2,482,000 × $250 / 2.10%]

= SQRT [$59,095,238,095.24]

= $243,095.12.

Optimum Level fo cash is $243,095.12.

Annual Storage cost = $243,095.12. × 2.10%

= $5,105

Annual Storage cost is $5,105.

Annual Ordering cost = [($6,800 × 365) / $243,095.12] × $250

= 10.21 × $250

= $2,552.50

Annual Ordering cost is $2,552.50.

Total Cost = Annual Storage cost + Annual ordering cost

= $5,105 + $2,552.50

= $7,657.50.

Total Cost is $7,657.50.