Question
a What is the operating cycle of a business? How does it vary for different types of business? Why is it important for the management to review this cycle?
b Explain why a shareholder would care if a firm accumulates a very large amount of cash. What options are available for a firm to manage cash if it believes it has too much cash?
c ABC Ltd uses a carbon black dye in the production of its tyres. The following information has been provided in respect to the carbon black dye used in production.
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Amount required
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250 000 kg per year
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Working days
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365
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Purchase price
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$10 per kg
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Cost of placing each order
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$14
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Carrying cost
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$1.8 per kg per year
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i What is the Economic Order Quantity (EOQ) for the company?
ii What is the number of orders per year?