Chapter 23: Other Topics in Working Capital Management
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
1. The cash balances of most firms consist of transactions, compensating, precautionary, and speculative balances. We can
produce a total desired cash balance by calculating the amount needed for each purpose and then summing them together.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.23.02 – LO: 23-2
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Target cash balance–nonalgorithmic
KEYWORDS:
DATE CREATED:
10/30/2017 8:15 PM
DATE MODIFIED:
1/8/2018 9:30 AM
2. The easier a firm’s access to borrowed funds the higher its precautionary balances will be, in order to protect against
sudden increases in interest rates.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.23.02 – LO: 23-2
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Precautionary balance–nonalgorithmic
KEYWORDS:
DATE CREATED:
10/30/2017 8:15 PM
DATE MODIFIED:
1/8/2018 9:30 AM
3. For some firms, holding highly liquid marketable securities is a substitute for holding cash because a marketable
securities portfolio can accomplish the same objective as cash.
a.
True
b.
False
ANSWER:
True
Chapter 23: Other Topics in Working Capital Management
QUESTION TYPE:
True / False
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.23.02 – LO: 23-2
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
forecasting, and cash flows
United States – OH – Default City – TBA
TOPICS:
Cash balances–nonalgorithmic
KEYWORDS:
10/30/2017 8:15 PM
DATE MODIFIED:
1/8/2018 9:30 AM
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Page 2
4. Which of the following is true of the Baumol model? Note that the optimal cash transfer amount is C*.
a.
b.
c.
d.
e.
ANSWER:
b
1
DIFFICULTY:
Difficulty: Moderate
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.23.02 – LO: 23-2
United States – BUSPROG: Analytic
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Baumol model–nonalgorithmic
OTHER:
TYPE: Multiple Choice: Conceptual
10/30/2017 8:15 PM
DATE MODIFIED:
1/8/2018 9:30 AM
5. Halliday Inc. receives a $2 million payment once a year. Of this amount, $700,000 is needed for cash payments made
during the next year. Each time Halliday deposits money in its account, a charge of $2.00 is assessed to cover clerical
costs. If Halliday can hold marketable securities that yield 5 percent, and then convert these securities to cash at a cost of
only the $2 deposit charge, what is the total cost for one year of holding the minimum cost cash balance according to the
Baumol model?
a.
$7,483
b.
$187
c.
$3,741
d.
$374
e.
$748
Chapter 23: Other Topics in Working Capital Management
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.23.02 – LO: 23-2
ANSWER:
d
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
Multiple Choice
HAS VARIABLES:
False
IFMG.DAVE.19.23.02 – LO: 23-2
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
Baumol model
KEYWORDS:
OTHER:
TYPE: Multiple Choice: Problem
10/30/2017 8:15 PM
DATE MODIFIED:
1/8/2018 9:30 AM
6. Humphrey’s Housing has been practicing cash management for some time by using the Baumol model for determining
cash balances. Some time ago, the model called for an average balance (C*/2) of $500; at that time, the rate on marketable
securities was 4 percent. A rapid increase in interest rates has driven the interest rate up to 9 percent. What is the
appropriate average cash balance now?
a.
$200
b.
$333
c.
$414
d.
$500
e.
$666
ANSWER:
b
Chapter 23: Other Topics in Working Capital Management
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
KEYWORDS:
DATE CREATED:
10/30/2017 8:15 PM
DATE MODIFIED:
1/8/2018 9:30 AM
1
DIFFICULTY:
Difficulty: Moderate
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.23.02 – LO: 23-2
forecasting, and cash flows
OTHER:
TYPE: Multiple Choice: Problem
7. Gemini Inc.’s optimal cash transfer amount, using the Baumol model, is $60,000. The firm’s fixed cost per cash transfer
of marketable securities to cash is $180, and the total cash needed for transactions annually is $960,000. On what
opportunity cost of holding cash was this analysis based?
a.
19.2%
b.
10.4%
c.
6.3%
d.
12.1%
e.
9.6%
ANSWER:
e
Chapter 23: Other Topics in Working Capital Management
DATE CREATED:
10/30/2017 8:15 PM
Copyright Cengage Learning. Powered by Cognero.
Page 5
8. Gemini Inc.’s optimal cash transfer amount, using the Baumol model, is $60,000. The firm’s fixed cost per cash transfer
of marketable securities to cash is $180. In addition, the total estimated cash costs (transfers and carrying cost) for the
firm, based on 16 transactions per year, are $5,760. On what opportunity cost of holding cash was this analysis based?
a.
19.2%
b.
10.4%
c.
6.3%
d.
12.1%
e.
9.6%
ANSWER:
e
1
DIFFICULTY:
Difficulty: Moderate
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.23.02 – LO: 23-2
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Opportunity cost: Baumol model–nonalgorithmic
OTHER:
TYPE: Multiple Choice: Problem
DATE MODIFIED:
1/8/2018 9:30 AM
9. Suppose Stanley’s Office Supply purchases 50,000 boxes of pens every year. Ordering costs are $100 per order and
carrying costs are $0.40 per box. Moreover, management has determined that the EOQ is 5,000 boxes. The vendor now
offers a quantity discount of $0.20 per box if the company buys pens in order sizes of 10,000 boxes. Determine the
before-tax benefit or loss of accepting the quantity discount. (Assume the carrying cost remains at $0.40 per box whether
or not the discount is taken.)
a.
$1,000 loss
Chapter 23: Other Topics in Working Capital Management
1
b.
$1,000 benefit
c.
$500 loss
d.
$500 benefit
e.
$0 (The change would not affect profits.)
d
POINTS:
1
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
IFMG.DAVE.19.23.02 – LO: 23-2
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
Quantity discounts–nonalgorithmic
KEYWORDS:
TYPE: Multiple Choice: Problem
DATE CREATED:
10/30/2017 8:15 PM
DATE MODIFIED:
1/8/2018 9:30 AM
Exhibit Duckett Group
The Duckett Group is trying to determine its optimal average cash balance. The firm has determined that it will need
$5,000,000 net new cash during the coming year. The fixed transaction cost of converting securities to cash is $50, and
the firm earns 10 percent on its marketable securities investments.
10. Refer to Exhibit Duckett Group. According to the Baumol model, what is the optimal transaction size for transfers
from marketable securities to cash?
a.
$7,071
b.
$38,357
c.
$70,711
d.
$102,956
e.
$87,000
ANSWER:
c
Chapter 23: Other Topics in Working Capital Management
Difficulty: Easy
QUESTION TYPE:
Multiple Choice
False
Exhibit Duckett Group
LEARNING OBJECTIVES:
IFMG.DAVE.19.23.02 – LO: 23-2
United States – BUSPROG: Analytic
forecasting, and cash flows
United States – OH – Default City – TBA
TOPICS:
Optimal transfer size
OTHER:
TYPE: Multiple Choice: Multi-part
The problems referring to Exhibit 28.1 MUST be kept together.
10/30/2017 8:15 PM
DATE MODIFIED:
1/8/2018 9:30 AM
1
DIFFICULTY:
Difficulty: Easy
Multiple Choice
False
PREFACE NAME:
Exhibit Duckett Group
IFMG.DAVE.19.23.02 – LO: 23-2
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
forecasting, and cash flows
United States – OH – Default City – TBA
Average cash balance
KEYWORDS:
TYPE: Multiple Choice: Multi-part
NOTES:
The problems referring to Exhibit 28.1 MUST be kept together.
10/30/2017 8:15 PM
1/8/2018 9:30 AM
11. Refer to Exhibit Duckett Group. According to the Baumol model, what should be Duckett’s average cash balance?
a.
$35,356
b.
$3,536
c.
$22,157
d.
$70,711
e.
$42,918
ANSWER:
a
Chapter 23: Other Topics in Working Capital Management
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.23.03 – LO: 23-3
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
12. Refer to Exhibit Duckett Group. What will be the total cost to Duckett of maintaining the optimal average cash
balance, as determined by the Baumol model?
a.
$35,356
b.
$7,071
c.
$18,493
d.
$70,711
e.
$53,190
ANSWER:
b
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
PREFACE NAME:
Exhibit Duckett Group
LEARNING OBJECTIVES:
IFMG.DAVE.19.23.02 – LO: 23-2
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Baumol model
KEYWORDS:
OTHER:
TYPE: Multiple Choice: Multi-part
NOTES:
The problems referring to Exhibit 28.1 MUST be kept together.
DATE CREATED:
10/30/2017 8:15 PM
DATE MODIFIED:
1/8/2018 9:30 AM
13. A just-in-time system is designed to stretch accounts payable as long as possible.
a.
True
b.
False
ANSWER:
False
Chapter 23: Other Topics in Working Capital Management
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
Inventory systems–nonalgorithmic
DATE CREATED:
10/30/2017 8:15 PM
1/8/2018 9:30 AM
Copyright Cengage Learning. Powered by Cognero.
Page 9
14. If a company increases its safety stock, then its EOQ will go up.
a.
True
b.
False
ANSWER:
False
1
DIFFICULTY:
Difficulty: Moderate
True / False
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.23.03 – LO: 23-3
United States – BUSPROG: Reflective Thinking
forecasting, and cash flows
United States – OH – Default City – TBA
TOPICS:
EOQ Extension–nonalgorithmic
DATE CREATED:
10/30/2017 8:15 PM
1/8/2018 9:30 AM
15. If a company increases its safety stock, then its average inventory will go up.
a.
True
b.
False
ANSWER:
True
1
Difficulty: Moderate
QUESTION TYPE:
True / False
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.23.03 – LO: 23-3
United States – BUSPROG: Reflective Thinking
forecasting, and cash flows
United States – OH – Default City – TBA
TOPICS:
EOQ Extension–nonalgorithmic
10/30/2017 8:15 PM
DATE MODIFIED:
1/8/2018 9:30 AM
16. Which of the following would cause average inventory holdings to decrease, other things held constant?
Chapter 23: Other Topics in Working Capital Management
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Page 10
a.
The purchase price of inventory items decreases by 50 percent.
b.
The carrying price of an item decreases (as a percent of purchase price).
c.
The sales forecast is revised downward by 10 percent.
d.
Interest rates fall.
e.
Fixed order costs double.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.23.03 – LO: 23-3
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Average inventory–nonalgorithmic
KEYWORDS:
OTHER:
TYPE: Multiple Choice: Conceptual
DATE CREATED:
10/30/2017 8:15 PM
DATE MODIFIED:
1/8/2018 9:30 AM
17. Which of the following is true of the EOQ model? Note that the optimal order quantity, Q, will be called EOQ.
a.
If the annual sales, in units, increases by 20%, then EOQ will increase by 20%.
b.
If the average inventory increases by 20%, then the total carrying costs will increase by 20%.
c.
If the average inventory increases by 20% the total order costs will increase by 20%.
d.
The EOC is the same for all companies.
e.
If the fixed per order cost increases by 20%, then EOQ will increase by 20%.
ANSWER:
b
POINTS:
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
LEARNING OBJECTIVES:
IFMG.DAVE.19.23.03 – LO: 23-3
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
EOQ model–nonalgorithmic
KEYWORDS:
OTHER:
TYPE: Multiple Choice: Conceptual
DATE CREATED:
10/30/2017 8:15 PM
DATE MODIFIED:
1/8/2018 9:30 AM
18. Each year, Holly’s Best Salad Dressing, Inc. (HBSD) purchases 50,000 gallons of extra virgin olive oil. Ordering costs
Chapter 23: Other Topics in Working Capital Management
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Page 11
are $100 per order, and the carrying cost, as a percentage of inventory value, is 80 percent. The purchase price to HBSD is
$0.50 per gallon. Management currently orders the EOQ each time an order is placed. No safety stock is carried. The
supplier is now offering a quantity discount of $0.03 per gallon if HBSD orders 10,000 gallons at a time. Should HBSD
take the discount?
a.
From a cost standpoint, HBSD is indifferent.
b.
No, the cost exceeds the benefit by $500.
c.
No, the cost exceeds the benefit by $1,000.
d.
Yes, the benefit exceeds the cost by $500.
e.
Yes, the benefit exceeds the cost by $1,120.
ANSWER:
e
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
LEARNING OBJECTIVES:
IFMG.DAVE.19.23.03 – LO: 23-3
United States – BUSPROG: Analytic
forecasting, and cash flows
United States – OH – Default City – TBA
TOPICS:
Quantity discounts–nonalgorithmic
OTHER:
TYPE: Multiple Choice: Problem
10/30/2017 8:15 PM
1/8/2018 9:30 AM
19. New England Charm, Inc. specializes in selling scented candles. The company has established a policy of reordering
inventory every 30 days. A recently employed MBA has considered New England’s inventory problem from the EOQ
model viewpoint. If the following constitute the relevant data, how does the current policy compare with the optimal
policy?
Ordering cost
= $10 per order
Carrying cost
= 20% of purchase price
Purchase price
= $10 per unit
Total sales for year
= 1,000 units
Safety stock
= 0
a.
Total costs will be the same, since the current policy is optimal.
b.
Total costs under the current policy will be less than total costs under the EOQ by $10.
c.
Total costs under the current policy exceed those under the EOQ by $3.
Chapter 23: Other Topics in Working Capital Management
1
Difficulty: Easy
QUESTION TYPE:
Multiple Choice
False
d.
Total costs under the current policy exceed those under the EOQ by $10.
e.
Cannot be determined due to insufficient information.
1
DIFFICULTY:
Difficulty: Moderate
Multiple Choice
HAS VARIABLES:
False
IFMG.DAVE.19.23.03 – LO: 23-3
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
Total inventory costs–nonalgorithmic
OTHER:
TYPE: Multiple Choice: Problem
10/30/2017 8:15 PM
DATE MODIFIED:
1/8/2018 9:30 AM
Exhibit Cartwright Computing
Cartwright Computing expects to order 126,000 memory chips for inventory during the coming year, and it will use this
inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm’s
inventory carrying costs is equal to 20 percent of the purchase price. (Assume a 360-day year.)
20. Refer to Exhibit Cartwright Computing. What is the economic ordering quantity for chips?
a.
12,088
b.
3,175
c.
6,243
d.
13,675
e.
8,124
ANSWER:
b
Chapter 23: Other Topics in Working Capital Management
Exhibit Cartwright Computing
LEARNING OBJECTIVES:
IFMG.DAVE.19.23.03 – LO: 23-3
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
forecasting, and cash flows
United States – OH – Default City – TBA
TOPICS:
EOQ
TYPE: Multiple Choice: Multi-part
NOTES:
The problems referring to Exhibit 28.2 MUST be kept together.
10/30/2017 8:15 PM
DATE MODIFIED:
1/8/2018 9:30 AM
Copyright Cengage Learning. Powered by Cognero.
Page 13
21. Refer to Exhibit Cartwright Computing. If Cartwright holds a safety stock equal to a 30-day supply of chips, what is
its average inventory level?
a.
12,088
b.
3,175
c.
15,750
d.
13,675
e.
8,124
ANSWER:
a
1
Difficulty: Easy
QUESTION TYPE:
Multiple Choice
False
PREFACE NAME:
Exhibit Cartwright Computing
IFMG.DAVE.19.23.03 – LO: 23-3
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
Average inventory
OTHER:
TYPE: Multiple Choice: Multi-part
The problems referring to Exhibit 28.2 MUST be kept together.
DATE CREATED:
10/30/2017 8:15 PM
1/8/2018 9:30 AM
22. Refer to Exhibit Cartwright Computing. Assume that Cartwright holds a safety stock equal to a 30-day supply of
chips. What is the maximum amount of inventory that will have on hand at any time, that is, what will be the inventory
level right after a delivery is made?
Chapter 23: Other Topics in Working Capital Management
POINTS:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
PREFACE NAME:
Exhibit Cartwright Computing
LEARNING OBJECTIVES:
IFMG.DAVE.19.23.03 – LO: 23-3
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
a.
9,216
b.
3,175
c.
6,243
d.
13,675
e.
8,124
ANSWER:
d
RATIONALE:
Maximum inventory level = EOQ + Safety stock = 3,175 + 10,500 = 13,675.
POINTS:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
PREFACE NAME:
Exhibit Cartwright Computing
LEARNING OBJECTIVES:
IFMG.DAVE.19.23.03 – LO: 23-3
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Maximum inventory
KEYWORDS:
OTHER:
TYPE: Multiple Choice: Multi-part
NOTES:
The problems referring to Exhibit 28.2 MUST be kept together.
DATE CREATED:
10/30/2017 8:15 PM
DATE MODIFIED:
1/8/2018 9:30 AM
23. Refer to Exhibit Cartwright Computing. How many orders should Cartwright place during the year?
a.
12
b.
25
c.
30
d.
40
e.
60
ANSWER:
d
Chapter 23: Other Topics in Working Capital Management
TOPICS:
Orders per year
OTHER:
TYPE: Multiple Choice: Multi-part
NOTES:
The problems referring to Exhibit 28.2 MUST be kept together.
10/30/2017 8:15 PM
DATE MODIFIED:
1/8/2018 9:30 AM
rounded to 40 = 126,000/3,175. Total cost = 40($200) + ($12,088)($25)(0.20) = $68,440.
24. Refer to Exhibit Cartwright Computing. If the lead time for placing an order is 5 days, and Cartwright holds a safety
stock equal to a 30-day supply of chips, then at what inventory level should an order be placed?
a.
15,570
b.
3,175
c.
12,250
d.
13,675
e.
8,124
ANSWER:
c
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
Multiple Choice
HAS VARIABLES:
False
Exhibit Cartwright Computing
LEARNING OBJECTIVES:
IFMG.DAVE.19.23.03 – LO: 23-3
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
forecasting, and cash flows
United States – OH – Default City – TBA
TOPICS:
Ordering inventory
KEYWORDS:
TYPE: Multiple Choice: Multi-part
NOTES:
The problems referring to Exhibit 28.2 MUST be kept together.
10/30/2017 8:15 PM
DATE MODIFIED:
1/8/2018 9:30 AM
25. Refer to Exhibit Cartwright Computing. If Cartwright holds a safety stock equal to a 30-day supply of chips, what is
Cartwright’s minimum cost of ordering and carrying inventory?
a.
$28,500
b.
$15,950
c.
$68,440
d.
$34,220
e.
$47,693
ANSWER:
c
Chapter 23: Other Topics in Working Capital Management
1
DIFFICULTY:
Difficulty: Easy
Multiple Choice
PREFACE NAME:
Exhibit Palmer Pens
IFMG.DAVE.19.23.03 – LO: 23-3
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
KEYWORDS:
TYPE: Multiple Choice: Multi-part
POINTS:
1
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
Exhibit Cartwright Computing
LEARNING OBJECTIVES:
IFMG.DAVE.19.23.03 – LO: 23-3
United States – BUSPROG: Analytic
forecasting, and cash flows
United States – OH – Default City – TBA
TOPICS:
Total inventory costs
OTHER:
TYPE: Multiple Choice: Multi-part
NOTES:
The problems referring to Exhibit 28.2 MUST be kept together.
10/30/2017 8:15 PM
DATE MODIFIED:
1/8/2018 9:30 AM
Exhibit Palmer Pens
Assume that Palmer Executive Pens uses 1,440,000 gallons of ink each year. Further, assume that Palmer can order the
ink at a cost of $2 per gallon plus fixed ordering costs of $100 per order. The firm‘s carrying cost is 20 percent of the
inventory value, at cost.
26. Refer to Exhibit Palmer Pens. What is the firm’s EOQ?
a.
26,833
b.
30,040
c.
43,987
d.
13,563
e.
21,456
ANSWER:
a
Chapter 23: Other Topics in Working Capital Management
NOTES:
The problems referring to Exhibit 28.3 MUST be kept together.
DATE CREATED:
10/30/2017 8:15 PM
DATE MODIFIED:
1/8/2018 9:30 AM
27. Refer to Exhibit Palmer Pens. What is Palmer’s minimum costs of ordering and holding inventory?
a.
$6,254
b.
$10,733
c.
$11,560
d.
$13,563
e.
$19,825
ANSWER:
b
POINTS:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
PREFACE NAME:
Exhibit Palmer Pens
LEARNING OBJECTIVES:
IFMG.DAVE.19.23.03 – LO: 23-3
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Total inventory costs
OTHER:
TYPE: Multiple Choice: Multi-part
NOTES:
The problems referring to Exhibit 28.3 MUST be kept together.
DATE CREATED:
10/30/2017 8:15 PM
DATE MODIFIED:
1/8/2018 9:30 AM
28. Refer to Exhibit Palmer Pens. Now, suppose the manufacturer offers a discount of 0.5 percent for orders of a least
40,000 gallons. Should Palmer increase its ordering quantity to take the discount?
a.
Yes; it will save $827 if it takes the discount.
b.
No; it will lose $827 if it takes the discount.
c.
Yes; it will save $14,400 if it takes the discount.
d.
Yes; it will save $13,573 if it takes the discount.
e.
No; it will lose $13,573 if it takes the discount.
ANSWER:
d
Chapter 23: Other Topics in Working Capital Management
Incremental costs = $11,560 − $10,733 = $827. Savings from discount =
($2)(0.005)(1,440,000) = $14,400. Net savings = $14,400 − $827 = $13,573.
POINTS:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
Exhibit Palmer Pens
LEARNING OBJECTIVES:
IFMG.DAVE.19.23.03 – LO: 23-3
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
forecasting, and cash flows
United States – OH – Default City – TBA
TOPICS:
Quantity discounts
OTHER:
TYPE: Multiple Choice: Multi-part
The problems referring to Exhibit 28.3 MUST be kept together.
10/30/2017 8:15 PM
DATE MODIFIED:
1/8/2018 9:30 AM
DIFFICULTY:
Difficulty: Moderate
Multiple Choice
LEARNING OBJECTIVES:
IFMG.DAVE.19.23.04 – LO: 23-4
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
forecasting, and cash flows
United States – OH – Default City – TBA
TOPICS:
Inventory accounting–nonalgorithmic
OTHER:
TYPE: Multiple Choice: Conceptual
29. During times of inflation, which of these inventory accounting methods is best for cash flow?
a.
b.
c.
d.
e.
ANSWER:
a
Chapter 23: Other Topics in Working Capital Management
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