WORKING CAPITAL & ECONOMIC ORDER QUANTITY

 

 

Economic order quantity (WC) is the optimal order quantity a company should purchase to minimise inventory costs, such as holding costs, shortage costs and order costs. PC World manufactures personal computers (PCs) and laptops. The company uses a central processing unit (CPU) as the primary component of each PC. It is estimated that the company requires 20,000 CPUs per year. In addition, all inventory holding costs for CPUs amount to £1 per unit per year, and it costs £20 to process each CPU.
1) What is the E0C1 for the CPU (Hint: calculation is required)? (10 marks)
2) At what inventory level should the order be placed to ensure that a delivery will arrive before the existing inventory depletes (Hint: calculation is required)? (10 marks)
3) As a financial analyst, suggest a working capital policy, such as an aggressive, moderate or conventional policy, to ensure PC world maintains a strong working capital cycle in the face of increasing competition from Dixons Computer Plc. Hint: this a conceptual question, calculation is not required. Higher marks will be given for rigorous answers with complete Harvard referencing. (30 marks)

Sample Solution

The economic order quantity (EOQ) is the optimal order quantity a company should purchase to minimize inventory costs, such as holding costs, shortage costs and ordering costs. In this case, PC World manufactures personal computers and laptops that require a central processing unit (CPU) as the primary component. The company estimates that it requires 20,000 CPUs per year and incurs an inventory holding cost of £1 per unit per year for all CPU holdings plus an additional cost of £20 for each CPU that must be processed. To calculate the EOQ for the CPU, two formulas are required:

EOQ = √2 × Annual demand × Order Cost/ Holding Costs

Reorder Point = Lead Time × Average Daily Usage

 

The first formula allows us to calculate the EOQ by substituting in our values; thus we have EOQ = √ 2 x 20000 x 20/1 = 800 CPUs. This means that PC World should purchase 800 CPUs at one time in order to minimize their total inventory-related costs.

In addition, to ensure a delivery will arrive before existing inventory depletes PC World needs to figure out its reorder point or ROP. The equation for calculating ROP is Reorder Point = Lead Time x Average Daily Usage which can also be written as ReorderPoint= NumberOfDaysToReceiveOrder X AverageDailyUsage . For example if it takes 15 days for a new shipment of PCs to arrive then average daily usage would need to be calculated by dividing annual demand by 365; in this case it equals 54 876/365 ≈ 150 CPUs.< br>
Therefore PC World’s reorder point is equal to 15 days x 150 CPUs or 2250 CPUs. This implies that when inventories drop below 2250 CPUs they should place an order in order not run out of stock while waiting on their new shipment of PCs.< br >< Br >In conclusion calculating Economic Order Quantity (EOQ) and Reorder Point (ROP) are important tools used by companies like PC world who want maximize efficiency and save money on inventory related expenses such purchasing large quantities but not too much or too little so these items don’t get wasted either way . By understanding these concepts businesses can better arrangement production schedules and keep necessary materials on hand without overspending unnecessarily.

Section I: INTRODUCTION TO THE STUDY Introduction The country is encountering a basic deficiency of medical care suppliers, a lack that is supposed to increment in the following five years, similarly as the biggest populace in our country’s set of experiences arrives at the age when expanded clinical consideration is vital (Pike, 2002). Staffing of emergency clinics, facilities, and nursing homes is more basic than any time in recent memory as the huge quantities of ‘gen X-ers’ start to understand the requirement for more continuous clinical mediation and long haul care. Interest in turning into a medical caretaker has disappeared lately, likely because of the historical backdrop of the extraordinary and requesting instructive cycle, low compensation, firm and extended periods of time, and fast ‘wear out’ of those rehearsing in the calling (Wharrad, 2003).

A complex oversaw care climate in this country is restricting the dollars accessible to be spent on nursing care. Numerous wellbeing callings, particularly nursing, have the standing of ‘eating their young’ as opposed to offering compelling coaching to develop future medical services suppliers. Because of these variables, the quantity of medical attendants has diminished and businesses regard themselves as understaffed and seeking able work force. Before 2001 the decay had been apparent for a considerable length of time (Sadler, 2003). Nursing schools, public pioneers, medical services pioneers and the overall population is impacted by the absence of Registered Nurses (RNs) accessible.

As the populace ages, the assumption is that a rising number of RNs will be required essentially to keep up with the ongoing degree of medical care. Furthermore, the momentum ecological and political worries of expanding pandemic sickness, event of synthetic and catastrophic events, and expanding dangers of war, requires critical expansions in the medical services labor force (Jefferys, 2001). The public nursing lack and factors that increment the interest for expanding the nursing labor force notwithstanding public, state, and nearby debacles make the potential for a general wellbeing emergency. Nursing programs have endeavored to satisfy need for medical attendants by expanding enlistment and campaigning effectively for expansions in program subsidizing by schools and states for understudies.

Tragically, the issue of nursing understudy weakening hampers the best endeavors of nursing programs and irritates the public lack of Registered Nurses in the United States (Ofori, 2002). In 2003, the National League for Nursing revealed a positive vertical pattern in the nursing labor force supply in any case, the American College of Healthcare Executives (2006) detailed that in 2005, 85% of emergency clinic directors decided medical clinics needed more enlisted medical attendants to fulfill patient consideration needs. The United States Bureau of Labor insights showed by 2014, more than 1.2 million new and substitution nursing positions would be expected to meet the public medical services needs (Ramsburg, 2007).

Various broad endeavors to diminish weakening have been made by nursing programs including reinforcing affirmation methods and executing maintenance programs. Unfortunately, the issues of weakening keep on continuing nursing schools the nation over. Admission to a nursing program is serious and numerous potential understudies are denied confirmation every semester. Steady loss from nursing programs influences not just the particular understudy who is acknowledged to a nursing program and ineffective, yet in addition the understudy denied confirmation that might have been effective. Steady loss rates are expensive to understudies, nursing projects, and medical services the same by diminishing the quantity of likely alumni from schools of nursing and adding to the nursing lack. Many examinations feature the a lot higher than wanted whittling down rates for nursing understudies

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