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Can you explain why working capital increase when non current assets are sold?
The production manager has established the following information about a major
inventory item.Purchase price per unit $480
Annual demand 4,000
Supplier’s delivery costs per order $10
Chief buyer’s salary per annum $30,000
Total number of orders placed per annum* 1,000
Annual storage costs per unit $2
Cost of capital 10% per annum*Relates to all product lines, not just this one.
What is the economic order quantity for this inventory item
I do not understand what you are meaning because there is no mention of any non-current assets in the question.
This is a standard economic order quantity question and needs you to use the EOQ formula as explained in my lectures.
The first one I saw it in one of the answers in the kit for the question ‘ Which of the following is most likely to increase the working capital’. Can you explain how working capital increase when non current assets are sold?
In the 2nd question, my doubt is , in the kit the ordering cost is calculated as usual and then adding 10% of purchase price.. I didn’t get that part.
If they sell a non-current asset then non-current assets decrease and either cash or (more likely) receivables will increase. So current assets increase and therefore the working capital increases.
As I explain in my free lectures, the interest tied up in inventory (i.e. the cost of capital) is one of the most important costs of holding inventory.
Have you watched my free lectures?
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