GDP, Ordering Quantity Flashcards
GDP formula:
GDP = C + G + I + (X-M)
What does the I in GDP formula stand for?
Investment by Business on Plant and Equipment
What does the G in GDP formula stand for?
Government Spending (federal + state + municipal)
What % of GDP is consumer spending in the USA?
~70%
Nominal GDP is also called
Current GDP
Nominal GDP is….
the current amount of goods and services * current price of goods and services
Real GDP is also called
Constant GDP
Constant GDP =
current amounts of goods and services * base year price of goods and services
Real GDP means….
GDP without distorting factor of inflation
The base year used for prices had “normal” economic conditions (no high inflation or recession)
Potential GDP reflects
if everyone in society works at 100% capacity, including factories
How long does ____ GDP need to decrease in order to quality an economy as being in a recession?
REAL
2 consecutive quarters > so 6 straight months
Inflation is measured by the
CPI
The CPI is an imaginary basket of….
184 goods and services that an average family of 4 uses
If the CPI increased by 0.7% last month, what is the projected annual inflation rate?
0.7% * 12 months = 8.4%
What is the Fed’s target rate of inflation
2%
Who was the chair of the council of president’s economic advisors under George HW Bush who defended that country was not technically in a recession
Dr Michael Boskin
What is the trade balance $ in the US
-$1 trillion (more imports than exports)
3 Main functions of the FOMC
- establish reserve requirement
- establish discount rate
- buy/sell government securities
Excess Reserve =
Amount of money you deposit - reserve requirement
The amount of cushion needed as a % over the amount in a deposit/checking account is
the reserve requirement
banks pay student loans, business loans, car loans, mortgages, etc out of their
excess reserve
In 2007 the discount rate was between
0% to 0.25%
Which action does the FOMC take most often?
Buy/Sell federal securities
Which action does the Fed take least often?
changing the reserve requirement
In an inflationary environment, the Fed may…
Increase the reserve requirement
Increase the discount rate
Sell government securities
By increasing the reserve requirement, the ____ shrinks
money supply
By buying government securities the Fed is going to ____ the money supply
expand
In a recessionary environment, the fed may ____ government securities
Buy
What are the 3 types of leverage
Operating Leverage
Financial Leverage
Combined Leverage
This type of leverage represents, if I can change by net income by 1%, how much change would I see in my EPS
Financial leverage
This type of leverage represents, if I can change sales by 1%, how much change would I see in my net income
Operating Leverage
This type of leverage represents, if I can change sales by 1%, how much change would I see in my EPS
combined leverage
If a company has a contribution of $480k, and fixed cost of $120k, what is it’s operating leverage
$480/($480 - $120) = 1.333
Contribution =
Quantity * (Price - V Cost)
If a company has an EBIT of $360k, and interest of $80k, what is it’s financial leverage
$360 / ($360 - $80) = 1.286
If a company has an operating leverage of 1.333, and a fixed leverage of 1.286, what is it’s combined leverage
1.714
At breakeven point, fixed cost =
contribution
Combined leverage formula =
Contribution / (Contribution - FC - Interest)
If a company has an EBT of $200k and is taxed at 21%, what is it’s EAT
$158k
What are examples of ordering cost
- cost of sending employees on a trip to find a new product and buy it
- processing fees for orders
What are examples of carrying costs
- rent of warehouse
- warehouse employee’s salary
- warehouse insurance
- warehouse security
- utilities
EOQ stands for
Economic Order Quantity
EOQ indicates how many units of an item we should order to _____ total ____ and total ____
Minimize
carrying costs
ordering costs
EOQ =
sqrt ( (2 * annual sales in units * ordering cost/unit) / carrying cost/unit)
What are the 2 underlying conditions for using the EOQ model
- you are moving or selling at a constant rate
2. when you sell the last unit you will immediately receive another delivery
Average inventory =
= Safety Stock + EOQ/2
When managing quantity to keep stocked, a trend is when ordering costs go down
frequency of orders go up
A company plans to use/sell 75000 units of a product this year. Their carrying cost is $1.20/unit. Their ordering cost is $2/unit. What is their EOQ?
500 units
If a company has an EOQ of 500, and they plan to consume 75000 units this year, how many orders will they place this year?
= 75000/500 = 150
Total Carrying Cost =
Average Inventory * Carrying Cost/unit
Total Annual Ordering Cost =
= Orders place/year * ordering cost/order
