AIA Inc. is looking to manage its cash position using the EOQ model. The company

Question

AIA Inc. is looking to manage its cash position using the EOQ model. The company is consuming cash at the rate of $6600 per day, and is open for business 365 days in the year. Each time the firm sells securities to obtain the cash, it costs them $200. The interest rate is 2.80%. What are the total costs (annual storage costs + annual order costs) associated with the EOQ?costs them $200. The interest rate is 2.80%. What are the total costs (annual storage costs + annual order costs) associated with the EOQ?

Explanation / Answer

EOQ=Sq Root (2*Ordering cost per order*Annual Usage)/Carrying cost of one unit per year Given : Ordering cost per order =$200 Annual cash usage =6600*365= $               2,409,000 Carrying cost of one unit per year =$0.028 per year   EOQ =Sq Root (2*200*2409000)/0.028=185511 So EOQ =$185,511 `No Of orders in years =2409000/185511=                            12.99 nos Total Ordering cost =13*200= $                  2,597.15 Average Cash holding =185511/2=                          92,756 Carrying cost =92756*2.8%= $                  2,597.15 So Total Cost Associated with the EOQ=2597.15+2597.15= $                  5,194.31

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