Uncertainty and safety stocks, Finance Basics

Assignment Help:

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


Related Discussions:- Uncertainty and safety stocks

Trial and error method, Trial and Error Method a) Select any rate of i...

Trial and Error Method a) Select any rate of interest on random and employ it to compute NPV of cash inflows. b) If rate selected produces NPV lower than the cost, want a l

Limitations of credit cards - source of finance, Limitations of Credit Card...

Limitations of Credit Cards - Source of Finance Limitations of Credit Cards as a Source of Finance are as follow: i) These cards lead to overspending on the part of the hol

Leverage or gearing ratios, Leverage or Gearing Ratios Leverage or gea...

Leverage or Gearing Ratios Leverage or gearing ratios are as follow: a) Debt ratio = Total debts/Total assets Whereas total debt = fixed charge capital + liabilities.

Shareholders - measuring business performance, Shareholders - Measuring Bus...

Shareholders - Measuring Business Performance Shareholders Actual owners are interested in the company's both short and long term survival.  For this cause they will need

Investment analysis, Investment Analysis Any type of company will inve...

Investment Analysis Any type of company will invest finance for the sake of deriving a return that is useful for four main purposes as: 1. To reward the owners or shareholder

Determinants of required rate of return, Determinants of Required Rate of R...

Determinants of Required Rate of Return 1.Risk free rate - This is the interest rate such would exist on default free securities like Treasury bills and bonds. Risk free

Disadvantages of payback period, Disadvantages of Payback Period 1. Do...

Disadvantages of Payback Period 1. Does not receive into account time value of money and supposes that a shilling obtained in the 1 st year and in the N th year have the sim

Leverage and coverage ratios, Leverage and Coverage Ratios   (The dat...

Leverage and Coverage Ratios   (The data for interest coverage are in I-Metrix's liquidity ratios section.  The others listed in this table are in the leverage ratios section

What is nominal and real return, What is Nominal and Real Return Whi...

What is Nominal and Real Return While nominal return is the return in nominal rupees, real return is equal to the nominal return adjusted for changes in prices i.e. rate of

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd