Concept Builder Exercises (CBE)

ANALYSIS OF FINANCIAL STATEMENTS:

Ratio Analysis:

RA_PROBLEM NO. 1

The following data relate to the financial statement of DEF Ltd for the year ended 31st
March,2022

Current Ratio 2.5:1

Working Capital Rs.45000
Acid Test Ratio 1.4:1
Inventory Turnover Ratio 5 times
Gross profit Ratio 40%
Earning per share Re.1
Earning as a percentage of Share Capital 25%
Debt Collection Period 36 days
Creditor’s Velocity 54 days
number of shares allotted 25000
Fixed Asset: Share holder’s Equity 0.7:1
Operating Ratio 90%
No. of working days in the year 360
There are no deferred expenses, prepaid expenses, long term liabilities and intangible assets.
Opening stock is less by Rs.4000/- than the Closing Stock .All sales and purchases are on credit
basis only.
You are requested to prepare a P& L Account for the year ended 31st March 2022 and Balance
sheet as on that date . Workings should form part of your answer.

RA_PROBLEM NO. 2
Current Ratio of a company is 2:1. What will be the impact of the following on the current ratio of
the company:

To pay a current liability

To sell a motor car for cash at a slight loss
To borrow money on an interest bearing promissory note
To purchase stock for cash
To give an interest bearing promissory note to a creditor to whom money was owed on current
account
CAPITAL BUDGETING
CB_PROBLEM NO. 1
A Limited Company is considering investing in a project requiring a capital outlay of
Rs.2,00,000. Forecast for annual income after depreciation but before tax is as
follows :
Year Rs.
1 1,00,000-50000+40000 =90000 cash Flow
2 1,00,000-50000+40000 = 90000
3 80,000- 40000+40000 = 80000
4 80,000 -40000+40000 = 80000
5 40,000 -20000+40000 = 60000
Depreciation may be taken as 20% on original cost and taxation at 50% of net income.
You are required to evaluate the project according to each of the following methods.
A) Pay-back method.
B) Rate of return on original investment method.
C) Rate of return on average investment method.
D) Discounted cash flow method taking cost of capital as 10%.
E) Net present value index method.
F) Internal rate of return method.

CB_PROBLEM NO. 2
A manufacturing unit of a company produces at present 2 products namely A and B. The sales
revenue and cost data are as follows:
A B
D Materials (Rs. Per Unit) 45 55
D Labour (Rs. Per Unit) 45 35
D. Expenses (Rs. Per Unit) 20 15

The number of units produced at present is for A 8000 and B 9500. The total overhead
cost Rs.5,25,000 is divided between two products on the basis of number of units. In addition,
the total depreciation cost is Rs. 1,80,000. The products are sold at Rs.190 and Rs. 170
respectively.

The company is planning to introduce a new product C. For this an investment in plant
would need Rs.600,000 . The life of the plant is 5 years. In the beginning of third year this plant
would need a major addition at the cost of Rs.1,50,000. There is no scrap value either for the
plant or for the major addition. The depreciation shall be charged based on straight -line
method. As the product is a socially relevant product the company will get one time cash subsidy
from the government in the beginning of the second year equivalent to the direct material and
direction labour cost incurred in the first year.
The other coast data are as under

D materials (Rs. Per Unit) 50

D Labour (Rs. Per Unit) 30
D Expenses (Rs. Per Unit) 10

The total overhead cost for the entire factory (All the three products) shall go up to Rs.. 6,00,000
per annum. The number of units produced for A and B shall remain the same for the next five
years.
The sales forecast for product C for the next 5 years is as under:

Year Expected sales in units

1 4,200
2 6,500
3 7,100
4 9,400
5 10,500
The selling price per unit shall be Rs. 150. The Government will not allow increasing the selling
price. However, it is expected that the direct labour cost may increase by 20 % in the beginning
of the third year and there after remain constant till the end of the fifth year. Other cost shall
remain unchanged for five years.

The cost of capital for the company is 11% and it uses NPV method for capital budgeting
decisions. Advise to the company whether it should add product C to its product line or not if the
tax rate is 30% basic + 10% surcharge on basic tax. It is given for your information that the
present value of Rs. 1 at 11% cost is as under :

Year Present Value of Re.1

1 .901
2 .812
3 .731
4 .659
5 .593

CB_PROBLEM NO. 3
A company is faced with the problem of choosing between two mutually exclusive projects.
Project A requires a cash outlay of Rs. 1,00,000 and cash running expenses of Rs. 35,000 per
year. On the other hand, Project B will cost Rs. 1,50,000 and require cash running expenses of
Rs. 20,000 per year. Both the machines have a eight-year life. Project A has a salvage value of
Rs. 4,000 and Project B has a salvage value of Rs. 14,000. The company’s tax rate is 50% and it
has a 10% required rate of return.
Assuming depreciation on straight line basis, ascertain which project should be accepted.
Present value of an annuity of Re. 1 for 8 years = 5.335 and present value of Re. 1 at the end of 8
years = 0.467, both at the discount rate of 10%.

CB_PROBLEM NO. 4
Forward Planning Ltd is considering whether to invest in a Project, which would entail
immediate expenditure on Capital equipment of Rs 40000.
Expected sales from the Project are as follows :
Probability Sales Volume
0.10 2000
0.25 6000
0.40 8000
0.15 10000
0.10 14000

Once the sales are established at a certain volume in the first year, they will continue at the
same volume in the subsequent years. The unit selling prices will be Rs 10, the unit variable cost
Rs 6 and the additional fixed costs will be Rs.20,000/- (all cash items).
The project would have a life of 6 years after which the equipment will be sold for scrap, which
would fetch Rs.3000/-.
You are requested to find out:
1. The expected value of the NPV of the project
2. The minimum volume of sales per annum required to justify the project

The cost of capital of the company is 10%. Discount factor of Re.1 per annum for 6 years at 10%
is 4.355 and the discount factor of Re.1 at the end of the sixth year at 10% is 0.5645. Ignore
taxation.

CB_PROBLEM NO. 5
A company is considering two mutually exclusive projects X and Y. Project X costs Rs.30,000
and Project Y Rs.36,000. You are given below the net present probability:

Project X Project Y
NPV Estimate (Rs.) Probability NPV Estimate (Rs.) Probability
0.1 3,000 0.2
3,000
6,000 0.4 6,000 0.3
12,000 0.4 12,000 0.3
15,000 0.1 15,000 0.2
i) Compute the expected net present value of projects X and Y.
ii) Compute the risk attached to each project, i.e. Standard deviation of each probability
distributions.
iii) Which project do you consider more risky and why?
iv) Compute the profitability index of each project.

Multiple IRR Problems

CB_PROBLEM NO. 6
An investment has an outlay of $800 today, an inflow of $5,000 at the end of 1 year, and an
outflow of $5,000 at the end of 2 years. What is its internal rate of return? If the initial outlay
were $1,250, what would be its IRR? (Hint: This case is an exception rather than the rule.)

CB_PROBLEM NO. 7
An investment has an inflow of $200 today, an outflow of $300 at the end of 1 year, and an inflow
of $400 at the end of 2 years. What is its internal rate of return? (Hint: Try calculating NPVs for a
wide range of required returns.)

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SENSITIVITY ANALYSIS:
CBR_PROBLEM NO. 1
X Ltd. is considering a project with the following cash flows:
Year Purchase of Running Costs Savings
Plant (Rs.) (Rs.) (Rs.)
0 (7000)
1 2000 6000
2 2500 7000
The cost of capital is 8%. Measure the sensitivity of the project to changes in the levels of Plant
Value, Running Costs and Savings (considering each factor at a time) such that Net Present value
becomes zero. Which factor is most sensitive to affect the acceptability of the project. The
Present value factors at 8% are as follows:
Year Factor
0 1.00
1 0.93
2 0.86

CBR_PROBLEM NO. 2
The initial investment outlay for a Capital Investment Project consists of Rs.100 lakhs for Plant
and Machinery and Rs.40 lakhs for Working Capital. Other details are summarised below:
Sales (qty Sold) : 1 lakh units of output per year for years 1 to 5
Selling Price : Rs.120 per unit of output
Variable Cost : Rs.60 per unit of output
Fixed Overheads : Rs.15 lakhs per year for years 1 to 5
(excluding depreciation)
Rate of Depreciation :25% on WDV method on Plant & Machinery
Salvage Value of Plant: Equal to the WDV at the end of year 5
& Machinery
Applicable Tax Rate : 40%
Time horizon : 5 years
Post-tax cut off rate : 12%

Required:
a) Indicate the financial viability of the project by calculating the Net Present Value.
b) Determine the Sensitivity of the Project’s NPV under each of the following conditions:
i) Decrease in Selling Price by 5%
ii) Increase in Variable Cost by 10%
iii) Increase in cost of Plant and Machinery by 10%.

CAPITAL RATIONING

CBR_PROBLEM NO. 3.
S Limited has Rs. 10,00,000 allocated for capital budgeting purposes. The following proposals
and associated Profitability Index have been determined.
Project Amount (Rs.) Profitability Index
1 300,000 1.22
2 150,000 0.95
3 350,000 1.20
4 450,000 1.18
5 200,000 1.20
6 400,000 1.05
Which of the above investment should be undertaken?
Assume that the Projects are indivisible and there is no alternative use of the money allotted
for capital budgeting.

DECISION TREE ANALYSIS

CBR_PROBLEM NO. 4
ABC Ltd is considering the purchase of a new plant requiring a cash outflow of Rs. 20000/-.
The following information is available to you :
Useful life : 2 years
1st year :
Cash flow(Rs.) Probability
8000 0.3
11000 0.4
15000 0.3
nd
2 Year :
If the cash flow in the 1st year are :
Rs. 8000 Rs.11000 Rs15000
Cash Flow Probability Cash flow Probability Cash Flow Probability
Rs. Rs. Rs.
4000 0.2 13000 0.3 16000 0.1
10000 0.6 15000 0.4 20000 0.8
15000 0.2 16000 0.3 24000 0.1

Presuming that 10% is the cost of capital , suggest whether the project should be taken up or
not.

DECISION MAKING UNDER RISK:

CBR_PROBLEM NO. 5
Find our which project is more risky.
State of market Probability Actual Cash Flow
Project A Project B
High 0.2 Rs.1000 Rs.1200
Normal 0.6 Rs.800 Rs.800
Low 0.2 Rs.600 Rs.400

PROJECT ABANDONMENT DECISIONS

CBR_PROBLEM NO. 6 Managerial options ----Expand,Suspend, Abandonment

The projected cash flows and the expected net abandonment values for a project are given
below:
Year Cash inflows Abandonment
Rs. Value (Rs).
0 (-) 100,000 Nil
1 35,000 65,000
2 30,000 45,000
3 25,000 20,000
4 20,000 Nil

Should the project be abandoned, and if so, when?

Cost of Capital may be taken as 10%
Given: Year PV Factor @ 10%
0 1.000
1 0.909
2 0.826
3 0.751
4 0.683

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COST OF CAPITAL :

CoC_PROBLEM NO. 1
The following information is extracted from the balance sheet of ABC ltd as of 31st March 2004
Rs. lakhs
EQUITY 400
12% DEBENTURE 400
TERM LOAN (INTEREST 18%) 1200
• Determine the Weighted average cost of capital of the company. T has been paying
dividends at a consistent rate of 20% per annum.
• What difference will it make if the current price of the Rs. 100 share is Rs.160?
• Determine the effect of Income Tax on the Cost of capital under both the premises.? (
Tax rate is 40%)

CoC_PROBLEM NO. 2.
The present capital structure of a company is as follows:
Rs. (million)
Equity Shares (Face value = Rs. 10) 240
11% Preference Shares (Face value = Rs. 10) 120
12% Debentures 120
14%Term Loans 360_
840_
Additionally the following information are available:
Company’s equity beta – 1.06
Yield on long-term treasury bonds – 10%
Stock market risk premium – 6%
Current ex-dividend equity share price – Rs. 15
Current ex-dividend preference share price – Rs. 12
Current ex-interest debenture market value – Rs. 102.50 per Rs. 100
Corporate tax rate – 40%
The debentures are redeemable after 3 years and interest is paid annually.
Ignoring flotation costs, calculate the company’s weighted average cost of capital
(WACC).

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DECISION ON CAPITAL STRUCTURE: HOW MUCH DEBT AND EQUITY CAPITAL?

CS&D_CALCULATION OF LEVERAGE:

CS&D_PROBLEM NO. 1
(A) Distinguish between Operating Leverage and Financial Leverage.
( B) Following Information is available relating to Alpha Ltd for the year ended 31st March 2006
:
Operating Leverage 3:1
Financial Leverage 2:1
Interest Charged per annum Rs.20 lacs
Corporate Tax 50%
Variable cost as a percentage of sales 60%
Prepare the Income Statement of the Company.
CS&D_PROBLEM NO. 2
The following figures are available for Success & Co. :
Net sales Rs. 15 crores
EBIT as percentage of Net Sales - 12 %
Capital employed :
(a) Equity Rs. 5 crores
(b) Preference Shares of Rs. 1 crore bearing 13 % Rate of Dividend
(c) Debt @ 15 % Rs. 3 crores.
The applicable Income Tax to be taken as 40%.
You are required to calculate
(i) the Return on Equity of the company; and
(ii) the Operating Leverage of the company. Given that its Combined Leverage is 3.
CS&D_PROBLEM NO. 3
The following figures relate to two Companies.
P Ltd. Q Ltd
Sales 500 1,000
Variable Costs 200 300
Contribution 300 700
Fixed Cost 150 400
150 300
Interest 50 100
Profit before Tax (PBT) 100 200
You are required to calculate:
(i) Operating, Financial and Combined Leverages of the two companies and
(ii) Comment on the relative position of the companies in respect of the risk.

EBIT-EPS Analysis
CS&D_PROBLEM NO. 4
American Express Ltd. is setting up a project with a capital outlay of Rs.60,00,000. It has the
following two alternatives in financing the project cost.
Alternative 1 : 100% Equity finance
Alternative 2 : Debt-equity ratio 2:1
The rate of interest payable on the debt is 18% p.a. The corporate rate of tax is 40%. Calculate
the indifference point between two alternative methods of financing.
CS&D_PROBLEM NO. 5

Paramount Produces Ltd. wants to raise Rs.100 lakhs for a diversification project. Current
estimate of earnings before interest and taxes (EBIT) from the new projects is Rs.22 lakhs
per annum.

Cost of debt will be 15% for amounts up to and including Rs.40 lakhs, 16% for additional
amounts up to and including Rs.50 lakhs and 18% for additional amounts above Rs.50
lakhs.

The equity shares (face value Rs.10) of the company have a current market value of Rs.40.
This is expected to fall to Rs.32 if debts exceeding Rs.50 lakhs are raised. The following
options are under consideration of the company:
Option Equity Debt
I 50% 50%
II 60% 40%
III 40% 60%

Determine the earning per share (E.P.S) for each option and state which option the
company should exercise. Tax rate applicable to the company is 50%.

THEORIES OF CAPITAL STRUCTURE

Net Income Approach

According to net income approach, the value of the firm and the value of equity are determined
as given below:

➢ Value of Firm (v) Where,

V =S+B S = Market value of Equity
B = Market value of Debt

➢ Market Value of Equity (S)

NI
S= Where,
Ke
NI = Net income available for Equity shareholders
Ke = Equity capitalization rate
CS&D_PROBLEM NO. 6

Glamour Ltd., earned a profit of Rs.20 lakhs before providing for interest and tax. The company’s
capital structure is as follows:

i) 4,00,000 Equity shares of Rs.10 each and its market capitalization rate is 16%.
ii) 25,000 14% secured redeemable debentures of Rs.150 each.

You are required to calculate the value of the firm under Net Income approach. Also calculate
the overall cost of capital of the Firm.

NET OPERATING INCOME APPROACH

NOI approach is opposite to the NI approach. According to this approach, the market value of
the firm depends upon the net operating profit or EBIT and the overall cost of capital, Weighted
Average Cost of Capital (WACC). The financing mix or the capital structure is irrelevant and does
not affect the value of the firm. The NOI approach is based on certain assumptions:

- The investors see the firm as a whole and thus capitalize the total earnings of the firm to
find the value of the firm as a whole
- The Overall Cost of Capital, Ko, of the firm is constant and depends upon the business
risk which also is assumed to be unchanged.
- The Cost of Debt, KD, is also constant.
- There is no tax.
- The use of more and more debt in the capital structure increases the risk of the
shareholders and thus results in the increase in the Cost of Equity Capital i.e., KE.

The NOI approach believes that the market values of the firm as a whole for a given risk
complexion. Thus, for a given value of EBIT, the value of the firm remains the same irrespective
of the capital composition, and instead depends on the overall cost of the capital.

Ascertainment of Value of Firm and Value of Equity

➢ Value of Firm (V)

Where
EBIT
V= EBIT = Earnings before interest and tax
Ko
Ko = Overall cost of capital

➢ Value of Equity (S)

S=V–B Where
V = Value of Firm
B = Value of Debt
CS&D_PROBLEM NO. 7
The Malock Company has net operating earnings of Rs.10 million and Rs.20 million of debt with
a 7 percent interest charge. In all cases, assume no taxes.
a. Using the net operating income approach and an overall capitalization rate of 11 percent,
compute the total market value, the stock market value, and the implied required return on
equity for the Malock Company prior to the sale of additional debt.
b. Determine the answers to part a if the company were to sell the additional Rs.10 million in
debt.

CS&D_PROBLEM NO.8
Abacus Calculation Company and Zoom Calculators, Inc., are identical except for capital
structures. Abacus has 50 percent debt and 50 percent equity, whereas Zoom has 20 percent
debt and 80 percent equity. (All percentages are in market-value terms.) The borrowing rate for
both companies is 8 percent in a no-tax world, and capital markets are assumed to be perfect.

a. (1) If you own 2 percent of the stock of Abacus, what is your dollar return if the company has
net operating income of Rs.360,000 and the overall capitalization rate of the company, k0 ,
is 18 percent? (2) What is the implied required rate of return on equity?
b. Zoom has the same net operating income as Abacus. (1) What is the implied required equity
return of Zoom? (2) Why does it differ from that of Abacus?

CS&D_PROBLEM NO. 9 (TRADITIONAL APPROACH)

In considering the most desirable capital structure of a company, the following estimates of the
cost of Debt and Equity capital (after Tax) have been made at various levels.
Debt-Equity Mix :
Debt as % of Cost of Debt Cost of Equity
total capital employed % %
0 5.0 12.0
10 5.0 12.0
20 5.0 12.5
30 5.5 13.0
40 6.0 14.0
50 6.5 16.0
60 7.0 20.0
Calculate the optimal Debt-Equity Mix for the company by calculating composite cost of capital.

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ACQUISITION DECISION DECISIONS USING CAPITAL BUDGETING

MnA_PROBLEM NO. 1
Frank Company may acquire Aziz Car Leasing Company. Frank estimates that Aziz will provide
incremental net income after taxes of Rs.2 million in the first year, Rs.3 million the second, Rs.4
million the third, Rs.5 million in each of the years 4 through 6, and Rs.6 million annually
thereafter. Owing to the need to replenish the fleet, heavier than usual investments are required
in the first 2 years. Capital investments and depreciation charges are expected to be (in millions):
Year
1 2 3 4 5 6 7 ON
Capital investment Rs.5 Rs.5 Rs.4 Rs.4 Rs.4 Rs.4 Rs.4
Depreciation Rs.3 Rs.4 Rs.4 Rs.4 Rs.4 Rs.4 Rs.4
The overall required rate of return is 15 percent. Compute the present value of the acquisition
based on these expectations. If you had a range of possible outcomes, how would you obtain
the information necessary to analyse the acquisition?

Receivables Management

RM_PROBLEM NO. 1
The present sales of ABC ltd are Rs.50 lacs. The company classifies its customers under three
credit categories A,B and C. The company extends unlimited credit to category A, limited credit
to category B and no credit to category C. As a result of this credit policy the company is
foregoing sales to the extent of 5 lacs to customers in category B and Rs. 10 lacs to customers in
category C.
The company is considering the adoption of a more liberal credit policy according to which
category B customers will be provided with unlimited credit and customers in category C will be
provided with limited credit.
Such relaxation would increase the sales by Rs. 10 lacs on which bad debt losses will be 8 %. The
contribution margin ratio (P/V) is 15%. Average collection period is 60 days. Cost of capital =
21%.
What will be the effect of relaxation of credit policy on the gross profit of the company?

RM_PROBLEM NO. 2
ABC ltd provides 45 days credit to its customers. Present level of sales is Rs. 1.50 crores. Cost of
capital = 15%. Variable cost to sales = 0.80.
Company is considering extending its credit period to 60 days.
Such an extension would increase the sales by 15 lacs. The bad debts proportional to sales would
be 5%.
Calculate the increase in gross profit after the change.

RM_PROBLEM NO. 3
The present credit terms of Taj Company are 1/10, net 30. Its sales are Rs.1.2 crores, its average
collection period is 24 days, its variable cost to sales ratio is 0.80, and its cost of funds is 15 per
cent. The proportion of sales on which customers currently take discount is 0.3. Taj Company is
considering relaxing its discount terms to 2/10 net 30. Such relaxation is expected to increase
the sales by Rs. 12 lakhs reduce the average collection period to 16 days, and increase the
proportion of discount sales to 0.7. What will be the effect of relaxing the discount policy on
gross profit ?
RM_PROBLEM NO. 4
Anil Ventures is considering relaxing its collection efforts. Presently its sales are Rs.50 lakhs, its
average collection period 25 days, its variable costs to sales ratio 0.75, its cost of capital 15 per
cent, and its bad debts ratio 0.04. The relaxation in collection efforts is expected to push sales
up by Rs.6 lakhs, increase the average collection period to 40 days, and raise the bad debts ratio
to 0.06.

What will be the effect of relaxing the collection effort on the gross profit of the firm ?

RM_PROBLEM NO. 5
Sufi Enterprises sells on terms 2/10, net 45. Total sales for the year are Rs.40 lakhs. Thirty per
cent of the customers pay on the tenth day and avail the discount; the remaining seventy per
cent pay, on average, 50 days after their purchases.
Calculate the average collection period and the average investment in receivables.

RM_PROBLEM NO. 6
Dhoni Company sells on terms 1/5, net 15. The total sales for the year are Rs.10 lakhs. The cost
of goods sold is Rs.7.5 lakhs. Customers accounting for 30 per cent of sales take discount and
pay on the fifth day, while others take an average of 25 days to pay.
Calculate :
a. the average collection period, and
b. the average investment in receivables.

RM_PROBLEM NO. 7
Udar Limited is considering a change in its credit terms from 2/10, net 30 to 3/10 net 45. This
change is expected to:
a. increase the total sales from Rs.50 lakhs to Rs.60 lakhs;
b. decrease the proportion of customers taking discount from 0.70 to 0.60;
c. increase the average collection period from 20 days to 24 days.
The gross profit margin for the firm is 15 per cent and the cost of funds is 18 per cent.
Calculate:
a) the expected change in gross profit, and
b) the expected cost of increasing the cash discount.

RM_PROBLEM NO. 8
The financial manager of a firm is wondering whether credit should be granted to a new
customer who is expected to make a repeat purchase. On the basis of credit evaluation, the
financial manager feels that the probability that the customer will pay is 0.85 and the probability
that the customer will default is 0.15. Once the customer pays for the first purchase, the
probability that he will pay for the repeat purchase increases to 0.95. The revenues from the sale
will be Rs.10,000 and the cost of sale would be Rs.8,500 – these figures apply to both the initial
and the repeat purchase. Should credit be granted?

RM_PROBLEM NO. 9
A firm is wondering whether to sell goods to a customer on credit or not. The revenues from sale
will be Rs.10,000 and the cost of sale will be Rs.8,000. What should be the minimum probability
that the customer will pay, in order to sell profitably?

Inventory Management

IM_PROBLEM NO. 1
Modern Electrical stores is trying to determine the economic order quantity for a certain type of
transformer. The firm sells 250 numbers of this transformer annually at a price for Rs.200 per
piece. The purchase price per transformer to the firm is, however, Rs.150. The cost of carrying a
transformer is Rs.30 per year and the cost of placing an order is Rs.200.
a) What is the total cost associated with placing one, two, five, and ten orders per year?
b) What is the economic order quantity ?

IM_PROBLEM NO. 2
Harilal Company requires 10,000 units of a certain item per year. The purchase price per unit is
Rs.25; the carrying cost per year is 25 per cent of the inventory value; and the fixed cost per order
is Rs.300.
a) Determine the economic order quantity.
b) How many times per year will inventory be ordered, if the size is equal to the EOQ?
c) What will be the total cost of carrying and ordering inventories when 10 orders are placed
per year?

IM_PROBLEM NO. 3
Consider the following data for a certain item purchased by Manish Limited
Annual usage = 6,000 units
Fixed cost per order = Rs.400
Purchase price per unit = Rs.100
Carrying cost = 20 per cent of inventory value
What is the economic order quantity ?
Now, assume that a discount of Rs.5 per unit is offered if the order size is 1,000 units.
Should Manish seek the quantity discount ?

IM_PROBLEM NO. 4
Spark Enterprises requires 5,000 units of a certain item annually. The cost per unit is Rs.30, the
fixed cost per order is Rs.300, and the inventory carrying cost is Rs.6 per unit per year.
The supplier offers quantity discount as follows:
The supplier offers quantity discount as follows:

Order Quantity Discount Percentage

1,000 5
2,000 10
What should Spark Enterprises do?

IM_PROBLEM NO. 5
Zee Fabrication Company requires steel for its fabrication work. The probability distributions of
the daily usage rate and the lead time for procurement are given below.
These distributions are independent.
Daily usage rate in Probability Lead time in days Probability
tonnes
4 .3 5 .6
6 .5 10 .2
8 .2 15 .2

The stockout cost is estimated to be Rs.4,000 per tonne. The carrying cost is Rs.1,000 per tonne
per year.
Required:
a) What is the optimal level of safety stock ?
b) What is the probability of stockout ?