Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Ch 28 Advanced Issues in Cash Management and Inventory Control
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%.
18. Each year, Holly's Best Salad Dressing, Inc. (HBSD) purchases 50,000 gallons of extra virgin olive oil. Ordering costs
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.
Ch 28 Advanced Issues in Cash Management and Inventory Control
e.
Yes, the benefit exceeds the cost by $1,120.
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.
d.
Total costs under the current policy exceed those under the EOQ by $10.
e.
Cannot be determined due to insufficient information.
Ch 28 Advanced Issues in Cash Management and Inventory Control
Exhibit 28.2
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 28.2. What is the economic ordering quantity for chips?
a.
12,088
b.
3,175
c.
6,243
d.
13,675
e.
8,124
Ch 28 Advanced Issues in Cash Management and Inventory Control
21. Refer to Exhibit 28.2. 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
Ch 28 Advanced Issues in Cash Management and Inventory Control
22. Refer to Exhibit 28.2. 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?
a.
9,216
b.
3,175
c.
6,243
d.
13,675
e.
8,124
23. Refer to Exhibit 28.2. How many orders should Cartwright place during the year?
Ch 28 Advanced Issues in Cash Management and Inventory Control
a.
12
b.
25
c.
30
d.
40
e.
60
24. Refer to Exhibit 28.2. 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
Ch 28 Advanced Issues in Cash Management and Inventory Control
25. Refer to Exhibit 28.2. 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
Ch 28 Advanced Issues in Cash Management and Inventory Control
Exhibit 28.3
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 28.3. What is the firm's EOQ?
a.
26,833
b.
30,040
c.
43,987
d.
13,563
e.
21,456
Ch 28 Advanced Issues in Cash Management and Inventory Control
27. Refer to Exhibit 28.3. 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
28. Refer to Exhibit 28.3. 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.
Ch 28 Advanced Issues in Cash Management and Inventory Control
29. During times of inflation, which of these inventory accounting methods is best for cash flow?
a.
LIFO, because the most expensive goods are recorded as being sold first, resulting in a higher cost of goods
sold and a lower reported net income.
b.
Specific identification, because it correctly identifies the actual item sold and so the actual cost is recorded on
the income statement.
c.
Weighted average, because it smoothes the reported cost of goods sold over time.
d.
It doesn't matter which you use since cash flow is unaffected by the choice of inventory identification method.
e.
FIFO, because the cheapest goods are recorded as being sold first, resulting in lower cost of goods sold and
higher reported net income.
Ch 28 Advanced Issues in Cash Management and Inventory Control
