Case Problem

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T HE A -TO- Z O FFICE S UPPLY C OMPANY

Christine Yamaguchi is the manager of the A-to-Z Office Supply Company in Charlotte. The company attempts to gain an advantage over its competitors by providing quality customer service, which includes prompt delivery of orders by truck or van and always being able to meet customer demand from its stock. In order to achieve this degree of customer service, A-to-Z must stock a large volume of items on a daily basis at a central warehouse and at three retail stores in the city and suburbs. Christine maintains these inventory levels by borrowing cash on a daily basis from the First Piedmont Bank. She estimates that for the coming fiscal year, the company's demand for cash to pay for inventory will be $17,000 per day for 305 working days. Any money she borrows during the year must be repaid with interest by the end of the year. The annual interest rate currently charged by the bank is 9%. Any time Christine takes out a loan to purchase inventory, the bank charges the company a loan origination fee of $1,200 plus 2 G points (2.25% of the amount borrowed).

Christine often uses EOQ analysis to determine optimal amounts of inventory to order for different office supplies . Now she is wondering if she can use the same type of analysis to determine an optimal borrowing policy. Determine the amount of the loan Christine 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. Also determine the level of cash on hand at which the company should apply for a new loan, given that it takes 15 days for a loan to be processed by the bank.

Suppose the bank offers Christine a discount, as follows : On any loan amount equal to or greater than $500,000, the bank will lower the number of points charged on the loan origination fee from 2.25% to 2.00%. What would the company's optimal loan amount be?