3) The reorder point is the point at which a firm receives orders.
4) Safety stocks are extra inventories that can be drawn down when actual lead times and/or usage rates
are greater than expected.
5) In the ABC system of inventory management, the two-bin method or system could be utilized to
control C items.
6) In EOQ model, the average inventory is defined as the order quantity divided by 2.
7) The economic order quantity (EOQ) is the order quantity which minimizes the carrying costs per unit
per period.
8) In the EOQ model, if carrying costs increase while all other costs remain unchanged, the number of
orders placed would be expected to increase.
9) In the EOQ model, the total cost is minimized at the point where the order costs and carrying costs are
equal.
10) The reorder point is an inventory management system that compares production needs to available
inventory balances and determines when orders should be placed for various items on a firm’s bill of
materials.
11) Since its objective is to minimize inventory investment, a Just–in-Time (JIT) system uses no, or very
little, safety stocks.
12) A popular extension of materials requirement planning is manufacturing resource planning II, which
integrates data from numerous areas such as finance, accounting, marketing, engineering, and
manufacturing using a sophisticated computer system.
13) A popular extension of materials requirement planning is inventory integration automation II, which
integrates data from numerous areas such as finance, accounting, marketing, engineering, and
manufacturing using a sophisticated computer system.
14) The objective for managing inventory is to ________.
A) turn over inventory as quickly as possible without losing sales from stockouts
B) improve the average collection period without affecting the sales
C) make payment for the inventory as slowly as possible without losing suppliers
D) reduce the time taken to process inventory into finished goods and increase sales
15) Which of the following is true of inventory level?
A) A purchasing manager would purchase higher inventories when prices are low and lower inventories
when prices are high irrespective of inventory requirement.
B) A marketing manager would like to have smaller inventories of finished products to ensure
production of goods as per customer specification.
C) A financial manager would keep inventory levels low to ensure that the firm’s money is not unwisely
invested in excess resources.
D) A manufacturing manager would keep raw materials inventories low to ensure use of latest materials
in production process.
16) Which of the following is true of maintaining appropriate inventory levels?
A) A financial manager’s general disposition toward inventory levels is to keep them low.
B) A marketing manager would like to have low inventories of a firm’s finished products.
C) A manufacturing manager would keep raw materials inventories low for the sake of lower unit
production costs.
D) A purchasing manager prefers lower level of inventories than are actually needed at the time.
17) When maintaining appropriate inventory level, a purchasing manager should ________.
A) keep the inventory level low, to ensure that the firm’s money is not being unwisely invested in excess
resources
B) ensure that all orders could be filled quickly, eliminating the need for back orders due to stockouts
C) implement the production plan to acquire the desired amount of finished goods available on time at a
low cost
D) maintain adequate amount of inventory on hand at desired times and at a favorable price
18) The ________ is a technique that divides inventory into three groups, according to dollar investment.
A) JIT system
B) ABC system
C) EOQ model
D) LIFO model
19) In the ABC system of inventory management, the ________ method could be utilized to control C
items.
A) basic economic order quantity
B) materials requirement planning
C) two-bin
D) just-in-time
20) In the ABC system of inventory management, the ________ method or system is appropriate for
managing B items.
A) basic economic order quantity
B) materials requirement planning
C) two-bin
D) just-in-time
21) The ________ is an inventory technique that takes into account various operating and financial costs
to determine the order quantity for a specific inventory item.
A) JIT system
B) ABC system
C) EOQ model
D) LIFO model
22) A computerized inventory system that simulates needed materials requirements for the finished
product, and then compares production needs to available inventory balances to determine when orders
should be placed is the ________.
A) basic economic order quantity system
B) materials requirement planning system
C) just-in-time system
D) red-line method
23) The philosophy of the ________ is that a firm would have only work–in-process inventory.
A) basic economic order quantity system
B) materials requirement planning system
C) just-in-time system
D) LIFO method
24) The total cost of a firm’s inventory is found by summing the ________.
A) order cost and the marginal cost of a firm’s inventory
B) order cost and the carrying cost of a firm’s inventory
C) order cost and the actual cost of a firm’s inventory
D) carrying cost and the marginal cost of a firm’s inventory
25) Which of the following is an example of carrying cost?
A) insurance of goods in transit
B) transportation cost
C) insurance cost
D) cost of inventory
26) The ________ uses no, or very little, safety stock.
A) basic economic order quantity system
B) materials requirement planning system
C) just-in-time system
D) FIFO method
27) In the EOQ model, ________ costs are the variable costs per unit of holding an item of inventory for a
specified time period.
A) marginal
B) order
C) carrying
D) processing
28) The economic order quantity (EOQ) is the order quantity which minimizes ________.
A) the order cost per order
B) the total inventory costs
C) the carrying costs per unit per period
D) order quantity in units
29) In the EOQ model, if the size of order increases, the ________.
A) carrying cost will increase
B) order cost will remain unchanged
C) order cost will increase
D) storage cost will decrease
30) The ________ is an inventory management technique that compares production needs to available
inventory balances and determines when orders should be placed for various material inputs.
A) ABC system
B) EOQ model
C) MRP system
D) JIT system
31) The ________ is an inventory management technique that minimizes inventory investment by having
materials inputs arrive at exactly the time they are needed for production.
A) ABC system
B) FIFO method
C) MRP system
D) JIT system
Table 15.4
Bowring Ball Bearings has 10 different items in its inventory. The average number of units held in
inventory and the average unit cost are listed for each item. The firm uses an ABC system of inventory
control.
32) Inventory items that belong in the A category include ________. (See Table 15.4)
A) Items 4 and 6
B) Items 1 and 7
C) Items 3 and 9
D) Items 1 and 9
33) Inventory items that belong in the C category include ________. (See Table 15.4)
A) Items 4 and 6
B) Items 6 and 8
C) Items 1, 7, and 9
D) Items 1 and 3
34) In the EOQ model, ________ costs are the fixed clerical cost of writing a purchase order, processing
the paper work, and verifying the invoice.
A) basic
B) order
C) carrying
D) insurance
35) The Steel Works, Inc. is required to carry a minimum of 40 days’ raw steel, which is 250 tons. It takes
15 days between order and delivery. At what level of steel would Steel Works reorder?
A) 3,750 tons
B) 600 tons
C) 667 tons
D) 344 tons
36) The General Chemical Company uses 150,000 gallons of hydro chloric acid per month. The cost of
carrying the chemical in inventory is 50 cents per gallon per year, and the cost of ordering the chemical is
$150 per order. The firm uses the chemical at a constant rate throughout the year. It takes 18 days to
receive an order once it is placed. The reorder point is ________.
A) 7,500 gallons
B) 25,000 gallons
C) 90,000 gallons
D) 105,000 gallons
37) The General Chemical Company uses 150,000 gallons of hydro chloric acid per month. The cost of
carrying the chemical in inventory is 50 cents per gallon per year, and the cost of ordering the chemical is
$150 per order. The firm uses the chemical at a constant rate throughout the year. The chemical‘s
economic order quantity is ________.
A) 32,863 gallons
B) 11,619 gallons
C) 9,487 gallons
D) 1,900 gallons
38) A popular extension of materials requirement planning that integrates data from numerous areas
such as accounting, finance, engineering, and manufacturing using a sophisticated computer system is
called ________.
A) computerized materials integration II
B) manufacturing resource planning II
C) inventory allocation planning II
D) inventory integration planning II
39) Harry’s Sheds has ten different items in its finished goods inventory. The average number of units
held in inventory and the average unit cost are listed for each item. The firm uses an ABC system of
inventory control.
(a) Which items should be considered to be in the A category of an ABC system of inventory?
(b) Which items should be considered to be in the B category of an ABC system of inventory?
40) Taizhou Products uses 800 units of a product per year on a continuous basis. The product has
carrying costs of $50 per unit per year and order costs of $300 per order. It takes 30 days to receive a
shipment after an order is placed and the firm requires a safety stock of 5 days usage in inventory.
(a) Calculate the economic order quantity (EOQ).
(b) Determine the reorder point. (Assume a 360-day year.)
41) Jia’s Apple Farm uses 12,600 baskets a year for apple shipment. Determine the optimum order
quantity of baskets assuming the order costs per order is $600 and it costs $2 to carry a unit of basket in
inventory per period.
42) Jia’s Apple Farm uses 35 baskets each day to pack apples for shipping. It takes 5 days to receive a
shipment of baskets after an order is placed and she would like a safety stock of 3 days in inventory. At
what level of inventory should Jia’s place an order for baskets?
43) Joe Manufacturing uses 2,400 units of a product per year on a continuous basis. The product carrying
costs are $60 per year and ordering costs are $250 per order. It takes 20 days to receive a shipment after an
order is placed and the firm requires a safety stock of 8 days of usage in inventory.
(a) Calculate the economic order quantity (round up to the nearest whole unit.)
(b) Calculate the total cost per year to order and carry this item.
(c) Its supplier has notified Joe that if Joe increases its order quantity by 58 units they will give it a
discount. Calculate the dollar discount that the suppliers will have to give Joe Manufacturing to result in
a net benefit to the company.
15.4 Accounts receivable management
1) One of the components of a cash conversion cycle is the average collection period.
2) A firm’s credit selection is the process of determining the minimum requirements for extending credit
to a customer.
3) Credit analysts usually analyze an applicant’s creditworthiness by using the dimensions of credit such
as character, capacity, capital, collateral, and conditions.
4) Credit selection involves application of techniques for determining which customers should receive
credit.
5) A firm’s credit standards are the minimum requirements for extending credit to a customer.
6) By increasing collection expenditures, a firm can decrease bad debt losses up to a point, beyond which
bad debts cannot be economically reduced.
7) The average investment of a firm in accounts receivable is equal to the firm’s total variable cost of
annual sales divided by its average collection period.
8) The objective for managing accounts receivable is to avoid credit sales as much as possible.
9) In analyzing an applicant’s creditworthiness, a credit manager typically gives primary attention to two
of the five C’s of credit—collateral and condition—since they represent the most basic requirements for
extending credit to an applicant.
10) One of the key inputs to the final credit decision is a credit analyst’s subjective judgment of a firm’s
creditworthiness since it can provide a better feel of a firm’s operation than any quantitative figures.
11) A firm’s credit selection procedures must be established on a sound economic basis that considers the
costs of investigating the creditworthiness of a customer and the expected size of its credit purchases.
12) A firm’s credit standard is a procedure for ranking an applicant’s overall credit strength, derived as a
weighted average of scores on key financial and credit characteristics.
13) As credit standards are relaxed, sales are expected to increase and the investment in accounts
receivable is expected to decrease.
14) The turnover of accounts receivable can be calculated by dividing 365 days by average collection
period.
15) Increasing the length of the credit period can increase sales, but both the investment in accounts
receivable and bad debt expenses are likely to increase as well.
16) If a firm relaxes its credit standards, the volume of accounts receivable increases and so does the
firm’s carrying cost.
17) A relaxation of credit standards is expected to affect profits positively due to lower carrying costs,
whereas tightening credit standards would affect profits negatively as a result of higher carrying costs.
18) The increase in bad debts associated with tightening credit standards raises bad debt expenses and
has a negative impact on profits.
19) The cost of marginal investment in accounts receivable can be calculated by finding the difference
between the average investment in accounts receivable before and after the introduction of the changes in
credit standards.
20) The cost of marginal bad debts is found by multiplying a firm’s opportunity cost by the difference
between the level of bad debts before and after the relaxation of credit standards.
21) The key dimension of credit selection which analyzes an applicant’s record of meeting past
obligations is ________.
A) collateral
B) capacity
C) character
D) capital
22) ________ is a procedure resulting in a number reflecting an applicant’s credit strength, derived as a
weighted average of the scores obtained on a variety of key financial and credit characteristics.
A) Credit scoring
B) Aging of receivables
C) CAPM
D) The economic order quantity model
23) The key dimension of credit selection which analyzes an applicant’s ability to repay the requested
credit focused on cash flows available is ________.
A) collateral
B) capital
C) conditions
D) capacity
24) ________ are established to evaluate a customer’s creditworthiness and to determine the minimum
requirements for extending credit to a customer.
A) Lines of credit
B) Credit limits
C) Collection agencies
D) Credit standards
25) Which of the following is true of credit scoring?
A) It audits the amount of assets the applicant has available for use in securing the credit.
B) It specifies the terms of sale for customers who have been extended credit by a firm.
C) It is an ongoing review of a firm’s accounts receivable to determine whether customers are paying
according to the stated credit terms.
D) It applies statistically derived weights to an applicant’s scores on key financial and credit
characteristics.
26) The key dimension of credit selection which analyzes the amount of assets an applicant has available
for use in securing the credit is ________.
A) capital
B) collateral
C) capacity
D) conditions
27) Which of the following is one of the five C’s of credit?
A) coordination
B) cost
C) character
D) control
28) A credit applicant’s ________ reflects its ability to repay the requested credit.
A) character
B) capacity
C) capital
D) collateral
29) A credit applicant’s ________ is his or her financial strength as reflected by his or her debt relative to
equity.
A) character
B) capacity
C) capital
D) collateral
30) A credit applicant’s ________ reflects his or her record of meeting past obligations.
A) condition
B) capacity
C) control
D) character
31) Which of the following is true of a credit applicant’s character?
A) It reflects a credit applicant’s ability to repay his debt obligation.
B) It reflects a credit applicant’s past payment history.
C) It reflects the level of liquid assets available with a credit applicant.
D) It reflects any unique conditions surrounding a credit applicant’s transaction.
32) As credit standards are relaxed, sales are expected to ________ and the investment in accounts
receivable is expected to ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
33) As credit standards are tightened, sales are expected to ________ and the investment in accounts
receivable is expected to ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
34) Which of the following major variables should be considered when evaluating proposed changes in
credit standards?
A) level of inventories
B) accounts payable
C) level of liquid assets
D) bad debt expenses