PROBLEM 1: Week 9 and Week 10 Working Cap Mgmt

Brooke Army Medical Center dispenses 275,000 bottles of brand name pharmaceutical annually.

The optimal safety stock (which is on hand initially) is 1,000 bottles. Each bottle costs the center $12,

inventory carrying costs are 25 percent, and the cost of placing an order with its supplier is $175.

a. What is the economic order quantity?

b. What is the maximum inventory for this medication?

c. How often must the center order (in days)?

PROBLEM 2: Week 9 and Week 10 Working Cap Mgmt

Northeast Baptist buys $400,000 of a particular item (at gross prices) from its major supplier,

Cardinal Health, which offers NE Baptist terms of 2/10, net 30. Currently, the hospital is paying the

supplier the full amount due on Day 30, but it is considering taking the discount, paying on Day 10 and

replacing the trade credit with a bank loan that has a 12 percent rate.

a. What is the amount of free trade credit that Baptist obtains from Cardinal Health? (Assume

360 days per year throughout this problem.)

b. What is the amount of costly trade credit?

c. What is the approximate annual cost of the costly trade credit?

d. Should Baptist replace its trade credit with the bank loan? Explain your answer.

e. If the bank loan is used, how much of the trade credit should be replaced?