Assume that there are no taxes or transaction costs, and that the Modigliani-Miller propositions are true. Bluth Banana Corp (BBC).
January 5, 2018
Toledo Tire Company recently bought a new compressor which automatically fills automotive tires to specified pressure. It was specified by the compressor manufacturer that standard deviation for the fillings was 2 PSI.
January 5, 2018

Suppose that XYZ Company is acquired by ABC Company. How much will ABC order at a time after the acquisition of XYZ? What are the annual inventory related savings for the new company (when compared to the situation where ABC and XYZ were operating independently)?

ABC Company sells widgets. Demand is constant, and equals 1837 units per year. Cost of placing an order is $100 per order. ABC buys the widgets at a cost $200 per unit, and sells them at a price of $300 per unit. ABC uses economic order quantity method for determining how much to order at a time. Inventory carrying charge is 20% per year.
XYZ Company also sells same widgets. Demand is constant, and equals 1200 units per year. XYZ buys widgets from the same vendor who supplies to ABC (at a cost equal to $200 per unit), and sells the widgets at a price of $305 per unit. XYZ purchases 250 widgets at a time. Order cost equals $100 per order. Inventory carrying charge is 20% per year.
Answer the following questions-
1. How many units does ABC buy at a time from its vendor? Show details of your work.
2. Determine the annual total inventory cost for XYZ.
3. Suppose that XYZ Company is acquired by ABC Company. How much will ABC order at a time after the acquisition of XYZ? What are the annual inventory related savings for the new company (when compared to the situation where ABC and XYZ were operating independently)?

 

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