Uncertainty and safety stocks, Finance Basics

Uncertainty and Safety Stocks

Usually requirements may not be certain and thus the firm holds safety stock to safeguard stock out cases.The safety stock guards against delays in receiving orders.  Nonetheless, carrying a safety stock has costs or it increases the average stock.

Demonstration

Consider illustration one and suppose that management desires to hold a minimum stock of 10 units or this stock is in hand at the starting of the year.

Required

a) Find out the re-order level

b) Find out the total relevant costs

Suggested solution

a) R       =       (DL/360) + S

Whereas:     S is the safety stock

                   =       ((2,000/360)  * 7) + 10

                   =       49 units

 b) The average inventory = ½Q + S

          TC     =       (½Q + S)Cn + D/QCo

                   =       [½(100) + 10]20 +  (2,000/100) * 50

                   =       1,200 + 1,000

                   =       Shs.2,200

Posted Date: 1/31/2013 8:12:47 AM | Location : United States







Related Discussions:- Uncertainty and safety stocks, Assignment Help, Ask Question on Uncertainty and safety stocks, Get Answer, Expert's Help, Uncertainty and safety stocks Discussions

Write discussion on Uncertainty and safety stocks
Your posts are moderated
Related Questions

I am facing some problems in my assignment of Performance Review in finance. Can anybody suggest me the proper explanation for it?

Define and explain the credit multplier

Assignment Gary and Beth have accepted the asset allocation that you have given them, but are now looking to you to give them some advice on what stocks they should purchase. R

what is the importance of public expenditure

Use the concepts of marginal cost and marginal revenue to derive an optimal capital budget for Company X, which has identified 7 possible investment projects and determined its cos

Internal finance can avoid the agency costs of debt and equity finance. In practice it is the most important source of funding. (a) Discuss potential problems of internal financ

A prospective developer is considering purchasing a site for the construction of a ‘Business Village’ at a price of £750 000. It will provide a let-able office floor space of 17 50

Business Ethics - Objectives of Business Entity Connected to the question of social responsibility is the matter of business ethics.  Ethics are explained as the "standards of

why borrow from a country with a high interest rate instead of a country with a low interest rate