BullsNBears, a Purveyor of Financial Databases, Estimates It They Disburses

question 168

Multiple Choice

BullsNBears, a purveyor of financial databases, estimates it they disburses $440,000 monthly in order to pay bills. The firm's opportunity rate is 5%. The fixed cost of transferring money is $25 per transfer. Based on historical data, the standard deviation of monthly cash flows is $15,000 and the lower cash balance limit is $20,000. For Miller-Orr model questions, assume the interest rate is 0.5% per month.

Using the BAT model, what is the optimal average cash balance?

• A) $34,495
• B) $36,332
• C) $37,195
• D) $45,619
• E) $53,227

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Definitions:

True Variable Cost

Costs that vary exactly with the level of activity or production volume, including direct materials and some elements of manufacturing overhead.

Fixed Cost

Costs that do not vary with the level of output or sales, remaining constant regardless of the business activity level, such as rent and salaries.

Period Cost

Expenditures that are not directly tied to the production process and are expensed in the period in which they are incurred.

Product Cost

The total expense incurred to produce and make ready for sale a product, including direct materials, labor, and overhead costs.