Theoretical Literature Review: Economic Order Quantity Model

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2.2 Theoretical Literature Review
2.2.1 Economic Order-Quantity Model
The EOQ model and formula are attributed to Harris (1913), it considers the tradeoff between ordering costs and storage costs. A larger order-quantity reduces ordering frequency, hence the ordering cost but requires holding a larger average inventory, which increases storage (holding) cost/month. On the other hand, a smaller order-quantity reduces average inventory but requires more frequent ordering and higher ordering cost/month. The cost- minimizing order-quantity is called the Economic Order Quantity (Schwarz, 2000).
2.2.2 Baumol Model
Baumol incorporates the principles of inventory management in his model, more specifically the principles of Economic Order Quantity (Fabozzi & Peterson, 2003). According to Baumol (1952), a cash inventory is an inventory of a specific form of exchange. In Baumol model, the EOQ is adapted to optimize the cash and best configuration based on the relationship between opportunity cost and transfer cost. So, the total transfer cost increases when the firm needs to sell bonds to accumulate cash, as the opportunity costs increase when there is a cash balance because it
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“It has been found that the largest portion of financial manager’s time is utilized in the management of working capital,” (Weston &Eugene, 1971). Working capital is the fund circulation of the business. Just as circulation of blood is essential in the human body for maintaining life, working capital is also essential to maintain the smooth running of the business. No business can run successfully without an appropriate amount of working
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