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Laruan Co, a large manufacturer of toys and dolls, uses large quantities of flesh-colored cloth in its doll production process. Throughout the year, the firm uses 1,250,000 square yards of this cloth. The fixed costs of placing and receiving an order are P2,000, which includes a P1,500 setup charge at the mill. The price of the cloth is P2.50 per square yard, and the annual cost of carrying this inventory item is 25% of the price. Laruan Co. maintains a 12,500 square yard safety stock. The cloth supplier requires a 2-week lead time from order to delivery

Required:

a. What is the EOQ for this cloth?

b. What is the total cost of inventory including the safety stock (assume that the safety stock is on hand at the beginning of the year)

c. Using a 52-week year, at what inventory unit level should an order be placed?

The following were forecasted total funds requirements for the coming year as shown in the following table.

Month Amount

January 2,000,000

February 2,000,000

March 2,000,000

April 4,000,000

May 6,000,000

June 9,000,000

July 12,000,000

August 14,000,000

September 9,000,000

October 5,000,000

November 4,000,000

December 4,000,000

a. Divide the firm's monthly funds requirement into (1) a permanent component and (2) a seasonal component, and find the monthly average for each of these components.

b. Describe the amount of long-term and short-term financing used to meet the total funds requirement under (1) an aggressive funding strategy and (2) a conservative funding strategy. Assume that, under the aggressive strategy, long-term funds finance permanent needs and short-term funds are used to finance seasonal needs.

c. Assuming that short-term funds cost 12% annually and that the cost of long-term funds is 17% annually, use the averages found in part a to calculate the total cost of each of the strategies described in part b.