44) Picture Company has one particular product that has an annual demand of 5,000 units. Total
manufacturing costs per unit total $50. Ordering costs for the product total $60 per purchase order.
Currently, the carrying costs per unit are 25% of manufacturing costs.
Required:
Determine the economic manufacturing order quantity.
45) Ralph was in the process of completing the quarterly planning for the purchasing department when a
major computer malfunction lost most of his data. For direct material XXX he was able to recover the
following:
Average inventory level of XXX
200
Orders per year
40
Average daily demand
48
Working days per year
250
Annual ordering costs
$4,000
Annual carrying costs
$6,000
Ralph purchases at the EOQ quantity level.
Required:
Determine the annual demand, the cost of placing an order, the annual carrying cost of one unit, and the
economic order quantity.
46) Clothes, Inc., has an average annual demand for red, medium polo shirts of 25,000 units. The cost of
placing an order is $80 and the cost of carrying one unit in inventory for one year is $25.
Required:
a. Use the economic-order-quantity model to determine the optimal order size.
b. Determine the reorder point assuming a lead time of 10 days and a work year of 250 days.
c. Determine the safety stock required to prevent stockouts assuming the maximum lead time is 20 days
and the maximum daily demand is 125 units.
47) An inventory item of Avizone Corp. has an average daily demand of 25 units with a maximum daily
demand of 30 units. The economic order quantity is 500 units. Without safety stocks, the reorder point is
125 units. Safety stocks are set at 235 units.
Required:
a. Determine the reorder point with safety stocks.
b. Determine the maximum inventory level.
c. Determine the average lead time.
48) For supply item ABC, Andrews Company has been ordering 125 units based on the recommendation
of the salesperson who calls on the company monthly. A new purchasing agent has been hired by the
company who wants to start using the economic-order-quantity method and its supporting decision
elements. She has gathered the following information:
Annual demand in units
250
Days used per year
250
Lead time, in days
10
Ordering costs
$100
Annual unit carrying costs
$20
Required:
Determine the EOQ, average inventory, orders per year, average daily demand, reorder point, annual
ordering costs, and annual carrying costs.
49) Discuss considerations that should be fully taken into account when developing inventory related
relevant costs for use in an economic order quantity (EOQ) model.
1) Which of the following costs is a relevant inventory carrying cost under EOQ decision model?
A) The lost contribution margin on future sales forgone as a result of customer dissatisfaction in product
quality.
B) The lost contribution margin on sales forgone because of the shortage of inventory.
C) The costs of storage space owned that cannot be used for other profitable purposes when inventories
decrease.
D) The costs of receiving and inspecting inventory and moving the inventories to the warehouses.
2) For inventory carrying costs, which of the following statements is true of the relevant opportunity cost
of capital of inventory?
A) It is the return received by investing capital in inventory rather than elsewhere.
B) It is calculated as the per-unit costs of carrying inventory divided by the required rate of return .
C) It is the return foregone by investing capital elsewhere rather than in inventory.
D) It is calculated as the required rate of return multiplied by the per-unit costs of acquiring inventory.
3) Which of the following statements is true of relevant inventory costs?
A) The salaries paid to clerks, stock keepers, and materials handlers are relevant carrying costs if they are
unaffected by changes in inventory levels.
B) The costs of expediting an order from a supplier are relevant incremental costs of stockouts.
C) Warehouse rent, warehouse workers’ salaries and costs of insurance, that change with the quantity of
inventory held are irrelevant carrying costs.
D) Those ordering costs that change with the number of orders placed are irrelevant ordering costs.
4) The annual relevant carrying costs of inventory consists of the sum of the ________.
A) relevant ordering costs and the relevant costs of quality
B) relevant ordering costs plus the relevant opportunity costs of capital
C) relevant incremental costs plus the relevant opportunity costs of capital
D) relevant incremental costs plus the relevant ordering costs
5) Which of the following costs is a relevant inventory stockout cost under EOQ decision model?
A) The costs of obsolescence and costs of insurance that change with the quantity of inventory held.
B) The return forgone by investing capital in inventory rather than elsewhere.
C) The lost contribution margin on sales forgone as a result of customer dissatisfaction due to
unavailability of goods.
D) The costs of storage space owned that cannot be used for other profitable purposes when inventories
decrease.
6) Increases in the carrying cost and decreases in the ordering cost per purchase order result in ________.
A) smaller EOQ amounts
B) larger EOQ amounts
C) larger relevant total costs
D) smaller relevant total costs
7) The costs of storage space owned are always relevant costs of carrying inventory.
8) The square root in the EOQ model diminishes the effect of estimation errors because it results in the
effects of the incorrect numbers becoming smaller.
9) The IBP Grocery orders most of its items in lot sizes of 10 units. Average annual demand per side of
beef is 720 units per year. Ordering costs are $25 per order with an average purchasing price of $100.
Annual inventory carrying costs are estimated to be 40% of the unit cost.
Required:
a. Determine the economic order quantity.
b. Determine the annual cost savings if the shop changes from an order size of 10 units to the economic
order quantity.
c. Since the shelf life is limited, the IBP Grocery must keep the inventory moving. Assuming a 360-day
year, determine the optimal lot size under each of the following: (1) a 20-day shelf life and (2) a 10-day
shelf life.
10) Why do conflicts arise between the EOQ model’s optimal order quantity and the order quantity that
managers regard as optimal?
11) The executive vice president of Robotics, Inc., is concerned because the cost of materials has not been
in line with the budget for several periods, even after implementing an EOQ model. The company has the
normal direct material variance computations of price and efficiency at the end of each month. The price
variance of the direct materials used is usually near expectations. The vice president does not understand
how the budget differences are always larger than the material price variances.
Required:
What explanation can you give for the evaluation problems presented?
Objective 20.4
1) Which of the following statements is true of just-in-time (JIT) purchasing?
A) In JIT purchasing, the optimal safety-stock level is the quantity of safety stock that minimizes the sum
of annual relevant stockout and carrying costs.
B) JIT purchasing is guided solely by the EOQ model because that model emphasizes the tradeoff
between relevant carrying and ordering costs.
C) In JIT purchasing, raw materials (or goods) are purchased so that products are delivered just as
needed for production or sales.
D) Only disadvantage of JIT purchasing is the higher level carrying and inspection costs.
2) Just-in-time purchasing requires ________.
A) larger and less frequent purchase orders
B) smaller and less frequent purchase orders
C) smaller and more frequent purchase orders
D) larger and more frequent purchase orders
3) The ________ describes the flow of goods, services, and information from the initial sources of
materials and services to the delivery of products to consumers.
A) customer list
B) enterprise requirements plan (ERP)
C) material requirements plan (MRP)
D) supply chain
4) Sharing sales information throughout the supply chain leads to ________.
A) larger stockouts
B) increased manufacturing of products not immediately needed by retailers
C) fewer manufacturing orders that had to be expedited
D) higher inventories held by each company in the supply chain
5) The only disadvantage of JIT purchasing is the higher levels of carrying and inspection costs.
6) Companies that implement JIT purchasing will emphasize developing short-term supplier
relationships to attain flexibility.
7) Just-in-time purchasing describes the flow of goods, services, and information from the initial sources
of materials and services to the delivery of products to consumers, regardless of whether those activities
occur in the same organization or in other organizations.
8) The supply chain describes the flow of goods, services, and information from the initial sources of
materials and services to the delivery of products to consumers, regardless of whether those activities
occur in the same company or in other companies.
9) The manufacturing manager of New Technology Company is concerned about the company’s newest
plant. When the plant began operations three years ago, it had the best of everything. It had modern
equipment, well-trained employees, engineered work and assembly stations, and a controlled
environment. During the first two years, the evaluation results were very good with almost all cost
variances being favorable. However, recently, things have turned negative.
In recent months, everything seems to be operating in a crisis management mode. Although most cost
variances remain favorable, the plant’s segment contribution is declining and customers are complaining
about poor quality and slow delivery. Several customers have suggested that they may take their
business elsewhere if things do not improve.
The shop floor is in continual turmoil. In-process inventory is everywhere, production employees have
difficulty finding jobs that need to be worked on, and scheduling has requested a larger computer to keep
track of work in process.
The vice president of sales does not know where to begin with solving the customers’ problems. It seems
that everyone is working very hard and the plant has the best facilities and trained employees in the
industry.
Required:
What is the nature of the plant’s problems? What recommendation would you make to help improve the
situation?
10) What is a supply chain, and what are the benefits of a supply chain analysis? Provide an example of
these benefits.
Objective 20.5
1) A push-through system that manufactures finished goods for inventory on the basis of demand
forecasts is referred to as ________.
A) just-in-time purchasing
B) materials requirements planning
C) relevant total costs
D) economic order quantity
2) A demand-pull system in which each component in a production line is produced immediately as
needed by the next step in the production line is referred to as ________.
A) just-in-time purchasing
B) materials requirements planning
C) relevant total costs
D) economic order quantity
3) Which of the following statements best defines a just-in-time production system?
A) a push-through system that manufactures finished goods for inventory on the basis of demand
forecasts
B) a push-through system in which each component in a production line is produced immediately as
needed by the next step in the production line
C) a demand-pull system that manufactures finished goods for inventory on the basis of demand
forecasts
D) a demand-pull system in which each component in a production line is produced immediately as
needed by the next step in the production line
4) Which of the following statements best defines a materials requirements planning system?
A) a demand-pull system in which each component in a production line is produced immediately as
needed by the next step in the production line
B) a push-through system that manufactures finished goods for inventory on the basis of demand
forecasts
C) a demand-pull system that manufactures finished goods for inventory on the basis of demand
forecasts
D) a push-through system in which each component in a production line is produced immediately as
needed by the next step in the production line
5) ________ is also called lean production.
A) Economic order quantity production
B) Just-in-time production
C) Materials requirements planning production
D) Push-through system
6) The management accountant aids in MRP by ________.
A) doing journal entries as requested
B) preparing plant appropriation requests
C) maintaining accurate records of inventory and its costs
D) contacting vendors to make sure they can deliver the materials in time
7) The demand-pull feature of JIT production systems results in close coordination among workstations
and smooths the flow of goods.
8) JIT production system always uses a master production schedule to organize the production.
9) A “push-through” system, often described as a materials requirement planning system, focuses first on
the forecasted amount and timing of finished goods and then determines the demand for materials
components and subassemblies at each of the prior stages of production.
10) To determine outputs at each stage of production, MRP uses a bill of materials detailing the materials,
components, and subassemblies for each final product.
11) Just-in-time systems are similar to materials requirement planning systems as both systems are
demand-pull systems.
34
12) Kretzinger Company makes extensive use of financial performance reports for each of its
departments. Although most departments have been reporting favorable cost variances with the
company’s current inventory system, management is concerned about the overall performance of the
purchasing department. For example, the following information is for the purchasing of materials for a
product the company has been manufacturing for several years:
Purchase Year
Quantity Used
Average
Inventory
20X1
40,000
8,000
20X2
60,000
15,000
20X3
60,000
20,000
20X4
50,000
12,500
20X5
54,000
18,000
20X6
58,000
23,200
Required:
a. Compute the inventory turnover for each year. Can any conclusions be drawn for a yearly
comparison of the purchase price variance and the inventory turnover?
b. Identify problems likely to be caused by evaluating purchasing only on the basis of the purchase
price variance.
c. What recommendations will improve the evaluation process?
13) Minnesota Ore Company mines iron ore for production into various metal products. During recent
years, the company has had large fluctuations in its inventories of metal ingots. Much of the volatility of
the inventory levels is due to the variability of demand by the company’s largest customers, automobile
manufacturers. For large orders, the company has the technology to quickly shift production from one
product to another.
Required:
Explain how the company can improve its inventory control system and give the advantages of whatever
you recommend.
1) A grouping of all the different types of equipment used to make a given product is referred to as
________.
A) total quality management
B) materials requirements planning
C) manufacturing cells
D) economic order quantity
2) Which of the following statements best defines manufacturing cells?
A) They are manufacturing areas that use a “push-through”approach whereby finished goods are
manufactured on the basis of demand forecasts.
B) They are manufacturing centers which focuses on production of a single product.
C) They are work areas with different types of equipment grouped together to make related products.
D) They are production centers in which goods are manufactured only after receiving customer orders.
3) The time required to get equipment, tools, and materials ready to start production is referred to as
________.
A) setup time
B) delivery time
C) manufacturing-cycle time
D) product design time
4) Which of the following statements best defines setup time?
A) It is the time required to manufacture an item, including order preparation time, inspection time, and
customer delivery time.
B) It is the time required to get equipment, tools, and materials ready to start the production of a
component or product.
C) It is a time or period ranging from the time when a customer orders goods to the time when they are
delivered to the customer.
D) It is the time required to create a new product to be sold by a business to its customers.
5) The time from when an order is received until it becomes a finished good is referred to as ________.
A) work-in-process time
B) manufacturing cycle time
C) pass-through time
D) product design time
6) Which of the following statements best defines manufacturing cycle time in a JIT production system?
A) the time from when raw materials is received until it becomes a finished good
B) the time from when an order is received until it becomes a finished good
C) the time from when raw materials is received until it is delivered to the customers
D) the time from when an order is received until it is delivered to the customers