1. Novelty Gifts, Inc. is experiencing some inventory control problems. The manager,
Wanda LaRue, currently orders 5,000 units four times each year to handle annual demand of 20,000 units. Each order costs $15 and each unit costs $1.50 to carry. Ms. LaRue maintains a safety stock of 200 units.
a) What is Novelty Gifts' current total annual inventory cost?
b) Calculate the economic ordering quantity (EOQ).
c) What is average inventory under EOQ if Ms. LaRue maintains a safety stock of 200 units.
d) Calculate total annual inventory cost under EOQ.
2. From the following income statement, calculate:
a) Degree of financial leverage.
b) Degree of operating leverage.
c) Degree of combined leverage.
Income Statement
for the year ended 12/31/03
Sales $440,000
TVC 240,000
Fixed costs (FC) 96 000
EBIT $104,000
Interes 19,200
EBT $ 84,800
Taxes @ 35% 29,680
Net income $ 55 120
Shares outstanding 16,000
EPS $ 3.44
3. Firm X is considering a project and its analysts have projected the following outcomes and their probabilities.
Outcome Probability of Outcome Assumptions
$5,250 25% pessimistic
$7,800 45% moderately successful
$13,500 30% optimistic