Inventory Management Quiz Financial Accounting Quiz Last updated Aug 7, 2024 Share /18 123456789101112131415161718 Inventory Management 18 questions in 30 minutes Pass Score 70% 1 / 18 The basic Economic Order Quantity (EOQ) model includes which of the following assumptions? I. The same fixed quantity is ordered at each reorder point. II. Purchasing costs are unaffected by the quantity ordered. III. Purchase order lead-time is known with certainty. IV. Adequate inventory is always maintained to avoid stockouts. I, II, and IV only I, II, III, and IV I and IV only II and III only The basic EOQ model assumes that the same fixed quantity is ordered at each reorder point, purchasing costs are unaffected by the quantity ordered, purchase order lead-time is known with certainty, and adequate inventory is always maintained to avoid stockouts. 2 / 18 Which one of the following is not explicitly considered in the standard calculation of economic order quantity (EOQ)? Quantity discounts Level of sales Carrying costs Fixed ordering costs Quantity discounts are not a factor in the EOQ formula. 3 / 18 Using the economic order quantity (EOQ) model as part of its inventory control program, an increase in which one of the following variables would increase the EOQ? Carrying cost rate Purchase price per unit Ordering costs Safety stock level Fixed cost per order is in the numerator of the EOQ fraction. An increase results in an increase in the EOQ. 4 / 18 The economic order quantity for a product is 500 units. However, new orders require 4 working days lead time during which 80 units will be used. Given this information, the correct economic order quantity is : 500 units 509 units 420 units 580 units The lead times does not affect the EOQ; it just means the order should be placed four days earlier. 5 / 18 The level of safety stock in inventory management depends on all of the following except the : Cost to reorder stock Level of customer dissatisfaction for back orders Cost of running out of inventory Level of uncertainty of the sales forecast Determining the appropriate level of safety stock involves a complex probabilistic calculation that balances the variability of demand for the good, the variability in lead time, and the level of risk the firm is willing to accept of having to incur stockout costs. Thus, the only one of the items listed that does not affect the level of safety stock is reorder costs. 6 / 18 The new manager of inventory at a major retailer is developing an inventory control system and knows he should consider establishing a safety stock level. The safety stock can protect against all of the following risks except for the possibility that : Shipments of merchandise from the manufacturers is delayed by as much as 1 week New competition may open in the company’s market area The distribution of daily sales will have a large variance due to holidays, weather, advertising, and weekly shopping habits Customers cannot find the merchandise they want, and they will go to the competition Safety stock cannot protect against the entry of new competitors. 7 / 18 An example of a carrying cost is : Spoilage Disruption of production schedules Handling costs Quantity discounts lost Inventory costs consist of four categories: purchase costs, order or set-up costs, carrying (holding) costs, and stockout costs. Carrying costs include storage costs for inventory items plus opportunity cost (i.e., the cost incurred by investing in inventory rather than making an income-earning investment). Examples are insurance, spoilage, interest on invested capital, obsolescence, and warehousing costs. 8 / 18 A review of inventories reveals the following cost data for entertainment centers. Invoice price $400.00 per unit Freight and insurance on shipment 20.00 per unit Insurance on inventory 15.00 per unit Unloading 140.00 per order Cost of placing orders 10.00 per order Cost of capital 25% What are the total carrying costs of inventory for an entertainment center? $115 $105 $420 $120 The cost of carrying a unit of inventory can be calculated as follows: Invoice price $400 + Freight and insurance on shipment 20 = Per-unit purchase cost $420 Times: cost of capital × 25% = Opportunity cost $105 + Insurance on inventory 15 Per-unit carrying cost = $120 9 / 18 All of the following are carrying costs of inventory except : Storage costs Insurance Opportunity costs Shipping costs The cost of shipping inventory is a cost of acquiring, not carrying, it. 10 / 18 Which one of the following would not be considered a carrying cost associated with inventory? Insurance costs Shipping costs Cost of obsolescence Cost of capital invested in the inventory Carrying costs are incurred to hold inventory. Examples include such costs as warehousing, insurance, the cost of capital invested in inventories, inventory taxes, and the cost of obsolescence and spoilage. Shipping costs and the initial cost of the inventory are the purchase costs. 11 / 18 A corporation’s inventory expressed as a percentage of current assets increased from 25% last July to 35% this July. The factor that is least likely to cause this increase is that the corporation : Has inventory that is becoming obsolete Is beginning to experience high growth Is a seasonal company with traditionally higher activity in the summer months Used a material amount of cash from selling its short-term investments to purchase land This statement is least likely to explain an increase in current assets from last July to this July. If the corporation was a seasonal company with traditionally higher activity in the summer months, it would budget similar amounts for each summer in expectation of the high activity. The sudden increase in current assets for the following summer would not be explained by the fact that they are a seasonal company. 12 / 18 In inventory management, the safety stock will tend to increase if the : Variability of the lead time increases Cost of running out of stock decreases Variability of the usage rate decreases Carrying cost increases A company maintains safety stocks to protect itself against the losses caused by stockouts. These can take the form of lost sales or lost production time. Safety stock is necessary because of the variability in lead time and usage rates. As the variability in lead time increases, a company will tend to carry larger safety stocks. 13 / 18 The amount of inventory that a company would tend to hold in safety stock would increase as the : Cost of carrying inventory decreases Sales level falls to a permanently lower level Variability of sales decreases Cost of running out of stock decreases A firm’s economic order quantity is a function of demand, carrying costs, and ordering costs. A decrease in carrying costs permits a company to carry more inventory at the same cost and thereby reduce stockout costs. 14 / 18 When the economic order quantity (EOQ) model is used for a firm that manufactures its inventory, ordering costs consist primarily of : Obsolescence and deterioration Storage and handling Production set-up Insurance and taxes A manufacturer can use the EOQ model by substituting production set-up costs for ordering costs. Set-up costs are the manufacturer’s equivalent of ordering costs. The result is sometimes referred to as the economic batch quantity. 15 / 18 The optimal level of inventory is affected by all of the following except the : Current level of inventory Cost per unit of inventory Cost of placing an order for merchandise Usage rate of inventory per time period The optimal level of inventory is affected by the factors in the economic order quantity (EOQ) model and delivery or production lead times. These factors are the annual demand for inventory, the carrying cost, which includes the interest on funds invested in inventory, the usage rate, and the cost of placing an order or making a production run. The current level of inventory has nothing to do with the optimal inventory level. 16 / 18 All of the following are inventory carrying costs except : Storage Insurance Inspections Opportunity cost of inventory investment Inventory carrying costs are incurred to hold inventory. Examples include the costs of storage, insurance, security, inventory taxes, depreciation or rent of warehouse facilities, obsolescence and spoilage, and the opportunity cost of inventory investment. Inspection costs are not related to the length of time inventory is held. They are costs of taking delivery and are best classified as ordering costs. 17 / 18 The carrying costs associated with inventory management include : Insurance costs, shipping costs, storage costs, and obsolescence Obsolescence, set-up costs, capital invested, and purchasing costs Purchasing costs, shipping costs, set-up costs, and quantity discounts lost Storage costs, handling costs, capital invested, and obsolescence Carrying costs include storage costs, handling costs, insurance costs,interest on capital invested, and obsolescence. 18 / 18 Using the standard economic order quantity (EOQ) model, if the EOQ for Product A is 200 units and a 50 unit safety stock is maintained for the item, what is the average inventory of Product A? 150 units 125 units 100 units 250 units If safety stock is 50 units, the receipt of an order should increase the inventory to 250. That amount will decline to 50 just prior to the receipt of the next order. Thus, the average inventory would be the average of 250 and 50 [(250 + 50) ÷ 2], or 150 units Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback automated inventory managementbest inventory management softwareInventory
