BFN 110 Lecture Notes - Lecture 28: Tunxis Community College, Total Order, Accounts Payable
6 Jan 2021
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Economic ordering quantity (eoq): the optimal (best) amount for the firm to order each time. Occurs at the low point (m) on the total cost curve the order size where total carrying costs equal total ordering costs (assuming no safety stock) Carrying costs: interest on finds tied up in inventory expenses implicit cost associated with the risk of obsolescence and period-ability. Cost of warehouse space, insurance premiums and material handling. When a financial manager needs to choose from several financing alternatives, the cost interest rate often is the deciding factor. The interest rate, r , is calculated on an annual basis. Largest source of shortterm financing for a firm. Trade payables are a spontaneous source of funds. Trade credit usually extended for 30-60 days. Extra inventory the firm keeps in stock in case of unforeseen problems. Management decision based on risk of stock out, desired level of service.
