ACCA Financial Management (F9) Certification Practice Exam

In the Miller-Orr Model, how is the Return Point calculated?

1. Lower Limit + (1/4 x spread)

2. Lower Limit + (1/2 x spread)

3. Lower Limit + (1/3 x spread)

4. Lower Limit - (1/3 x spread)

The correct answer is: Lower Limit + (1/3 x spread)

In the Miller-Orr Model, the Return Point is a key component that helps organizations manage their cash balances effectively by determining when to return to the optimal cash balance after it has fallen below a certain threshold. The Return Point is calculated by taking the Lower Limit of the cash balance and adding one-third of the spread, which is the difference between the upper limit and the lower limit of the cash balance range. This approach is designed to minimize the costs associated with holding excessive cash while also ensuring that the business is not operating with insufficient liquidity. By setting the Return Point at one-third of the spread above the Lower Limit, the model establishes a practical and efficient threshold for re-entering the optimal cash management area. This calculation strikes a balance by recognizing that as cash depletes and approaches the Lower Limit, the organization should take timely action to maintain an optimal level of liquidity and avoid disruption to its operations.