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A-to-Z

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THE A-TO-Z OFFICE SUPPLY COMPANY

INTORDUCTION

Christine Yamaguchi, the manager of the A-to-Z Office Supply Company, attempts to gain an advantage over its competitors by providing quality customer service, which includes to meet the customers need and to provide the prompt delivery. The company has to maintain a large volume stock at their central warehouse and at the three retail stores. In order to maintain the stock, Christine borrows cash on a daily basis from the First Piedmont Bank. The data provided by Christine is that the company’s demand for cash to pay for inventory will be $17,000 per day for 305 working days for the coming fiscal year. The money she borrows during the year must be repaid with 9% interest rate by the end of the year. The bank also charges the company a loan origination fee of $1,200 plus 2.25% ………. Christine wants to determine an optimal borrowing policy with the use of the EOQ analysis method. She also wants to determine the amount of the loan she should secure from the bank, the total annual cost of the company’s borrowing policy, and the number of loans the company should obtain during the year. She also wants to know the level of the cash on hand at which the company should apply for a new loan when it takes 15 days for the process. In addition, she wants to know the company’s optimal loan amount in case the bank offers a discount of 0.25% by lowering down the points charged from 2.25% to 2.00% if any loan amount exceeds $500,000.

ANALYSIS

To determine the loan amount per loan, total cost of borrowings to the company, the reorder point and whether discount policy benefits or no, the EOQ model analysis is perform. The total cost of the borrowing is determined by considering the parameters like demand, carrying cost and ordering cost. The 2.25% is not included in the calculations of loan amount per loan as it is the cost on...

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