3. 4.

Costs and the BAT model [LO 19.2] Debit and Credit Bookkeepers needs a total of $21 000 in cash during the year for transactions and other purposes. Whenever cash runs low, it sells $1 500 in securities and transfers in the cash. The interest rate is 4 per cent per year, and selling securities costs $25 per sale.

1. What is the opportunity cost under the current policy? The trading cost? With no additional calculations, would you say that Debit and Credit keeps too much or too little cash? Explain.

2. What is the target cash balance derived using the BAT model?