Illustration.

1:

Optimum Cash Balance (C) =

√2 µ x P
S

Where

C = Optimum cash balance

µ = Cash requirements (Br.90,000 i.e annual or Monthly cash disbursements)

P = Fixed cost per transaction (Br.15)

S = Interest rate on marketable securities (6% p.a)

C = √
2 x 90,000 x Br .15
6/100

C = √
2,700,000
0.06

C = √ 45 , 000 , 000
C = Br.6,708.20

Illustration.2:

Optimum Cash Balance (C) =

√2 µ x P
S

Where

C = Optimum cash balance

µ = Cash requirements (Br.100,000 i.e annual or Monthly cash disbursements)

P = Fixed cost per transaction (Br.100 Fixed conversion cost)

S = Interest rate on marketable securities (5% p.a Opportunity cost or holding cost)

C = √
2 x 100,000 x Br .100
5 /100

C = √
20 , 000,000
0.05

C = √ 400 , 000 , 000 C = Br.20,000

 Table Indicating Lot Size
A. Annual requirements of cash Br.100,000 Br.100,00 Br.100,000 Br.100,00 Br.100,000
0 0
B. Lot size of securities 5,000 10,00 20,000 25,00 50,000
0 0
C. No. of Lot Sizes ( A ÷ B ) 20 10 5 4 2
D. Average Holding of Cash (B÷2) 2,500 5,00 10,000 12,50 25,000
0 0
E. Interest at 5% (D x 5/100) 125 250 500 625 1,250
F. Fixed Conversion Cost(lot size) 100 100 100 100 100
G. Total conversion Cost (C x F) 2000 1000 500 400 200
H. Total Cost (E + G) 2125 1250 1000 1025 1450

The above table indicates that the total cost minimum at Br.1000 when the lot size of securities is
Br.20,000. So the economic lot size is of the securities is Br.20,000.

Illustration.3:
Combolcha Textiles Ltd., Cash Budget for the Quarter ended 31st July, 2021

Description May June July

Br. Br. Br.
Opening Balance 8,000 * 15,750 12,750

Receipts:
Debtors 62,000 64,000 58,000
Total Receipts 70,000 79,750 70,750
Payments:
Creditors 36,000 38,000 33,000
Wages 8,000 10,000 8,500
Manufacturing Expenses 3,750 4,000 3,750
Office Expenses 1,500 2,500 2,000
Selling Expenses 5,000 4,500 3,500
Advance Tax ---- 8,000* ---
Delivery of Plant (10% payment of delivery) ---- 1,600 *

Total Payments 54,250 67,000 52,350

Closing Balance 15,750 12,750 18,400
Working Notes :

Manufacturing Expenses:
May ----- April - 1500 (3000 x ½)
May - 2250 (4500 x ½)
3,750

June ------ May - 2250

June - 1750
4000

June ------ June - 1750

July - 2000
3,750
Office Expenses:
Next Month will be paid.

Plant Costing:
16,000 x 10/100 = 1600