Inventory Management Quiz Managerial Accounting Quiz Share Inventory Management 18 questions in 30 minutes Pass Score 70% 1 / 18 Using the standard economic order quantity (EOQ) model, if the EOQ for Product A is 200 units anda 50 unit safety stock is maintained for the item, what is the average inventory of Product A? 150 units 100 units 125 units 250 units If safety stock is 50 units, the receipt of an order should increase theinventory to 250. That amount will decline to 50 just prior to the receipt ofthe next order. Thus, the average inventory would be the average of 250and 50 [(250 + 50) รท 2], or 150 units 2 / 18 An example of a carrying cost is : Disruption of production schedules Handling costs Spoilage Quantity discounts lost Inventory costs consist of four categories: purchase costs, order or set-upcosts, carrying (holding) costs, and stockout costs. Carrying costs includestorage costs for inventory items plus opportunity cost (i.e., the costincurred by investing in inventory rather than making an income-earninginvestment). Examples are insurance, spoilage, interest on invested capital,obsolescence, and warehousing costs. 3 / 18 Which one of the following statements concerning the economic order quantity (EOQ) is correct? Increasing the EOQ is the best way to avoid stockouts The EOQ results in the minimum ordering cost and minimum carrying cost The EOQ model assumes constantly increasing usage over the year The EOQ model assumes that order delivery times are consistent One of the underlying assumptions of the EOQ model is that delivery timesare predictably consistent. Other assumptions are that sales are perfectlypredictable and that usage is constant. 4 / 18 Which one of the following is not explicitly considered in the standard calculation of economic orderquantity (EOQ)? Quantity discounts Carrying costs Level of sales Fixed ordering costs Quantity discounts are not a factor in the EOQ formula. 5 / 18 The following information regarding inventory policy was assembled. The company uses a 50 weekyear in all calculations. Sales 12,000 units per year Order quantity 4,000 units Safety stock 1,500 units Lead time 5 weeks The reorder point is : 5,500 units 1,200 units 2,700 units 240 units The reorder point is the inventory level at which an order should be placed. It can be quantified using the following equation: Reorder point = (Average weekly demand ร Lead time) + Safety stock ย ย ย ย ย ย ย ย ย ย ย ย ย ย ย = [(12,000 units รท 50 weeks) ร 5 weeks] + 1,500 units ย ย ย ย ย ย ย ย ย ย ย ย ย ย ย = 1,200 units + 1,500 units ย ย ย ย ย ย ย ย ย ย ย ย ย ย ย ย = 2,700 units 6 / 18 A company serves as a distributor of products by ordering finished products once a quarter and usingthat inventory to accommodate the demand over the quarter. If it plans to ease its credit policy forcustomers, the amount of products ordered for its inventory every quarter will be : Unaffected if the JIT inventory control system is used Reduced to offset the increased cost of carrying accounts receivable Unaffected if safety stock is part of the current quarterly order Increased to accommodate higher sales levels Relaxing the credit policy for customers will lead to increased salesbecause more people will be eligible for more credit. As sales increase,purchase orders will increase to accommodate the higher sales levels. 7 / 18 The new manager of inventory at a major retailer is developing an inventory control system andknows he should consider establishing a safety stock level. The safety stock can protect against all ofthe following risks except for the possibility that : Shipments of merchandise from the manufacturers is delayed by as much as 1 week Customers cannot find the merchandise they want, and they will go to the competition New competition may open in the companyโs market area The distribution of daily sales will have a large variance due to holidays, weather, advertising, and weekly shopping habits Safety stock cannot protect against the entry of new competitors. 8 / 18 The optimal level of inventory is affected by all of the following except the : Cost of placing an order for merchandise Cost per unit of inventory Usage rate of inventory per time period Current level of inventory The optimal level of inventory is affected by the factors in the economicorder quantity (EOQ) model and delivery or production lead times. Thesefactors are the annual demand for inventory, the carrying cost, whichincludes the interest on funds invested in inventory, the usage rate, and thecost of placing an order or making a production run. The current level ofinventory has nothing to do with the optimal inventory level. 9 / 18 The economic order quantity for a product is 500 units. However, new orders require 4 working dayslead time during which 80 units will be used. Given this information, the correct economic orderquantity is : 509 units 580 units 420 units 500 units The lead times does not affect the EOQ; it just means the order should beplaced four days earlier. 10 / 18 All of the following are inventory carrying costs except : Storage Inspections Opportunity cost of inventory investment Insurance Inventory carrying costs are incurred to hold inventory. Examples includethe costs of storage, insurance, security, inventory taxes, depreciation orrent of warehouse facilities, obsolescence and spoilage, and the opportunitycost of inventory investment. Inspection costs are not related to the lengthof time inventory is held. They are costs of taking delivery and are bestclassified as ordering costs. 11 / 18 An inventory management technique designed to minimize inventory investment by having materialsarrive at the time they are needed for use is known as : Materials requirements planning (MRP) The economic order quantity model (EOQ) First in first out (FIFO) Just in time (JIT) A just-in-time (JIT) inventory management system limits the output ofeach manufacturing operation to the demand of the next operation. Shipment of raw materials from vendors are scheduled to arrive โjust intimeโ to be used in the production process. Inventory storage is considereda nonvalue adding activity, and raw materials on hand are thus kept to aminimum. 12 / 18 A company expects to use 48,000 gallons of paint per year costing $12 per gallon. Inventorycarrying cost is equal to 20% of the purchase price. The company uses its inventory at a constantrate. The lead time for placing the order is 3 days, and the company holds 2,400 gallons of paint assafety stock. If the company orders 2,000 gallons of paint per order, what is the cost of carryinginventory? $5,760 $5,280 $8,160 $2,400 The companyโs per-gallon carrying cost is $2.40 ($12 purchase price pergallon ร 20% carrying cost). The cost of carrying safety stock is $5,760(2,400 gallons ร $2.40), and the cost of carrying average inventory is$2,400 (1,000 gallons ร $2.40). Thus, total inventory carrying cost is$8,160 ($5,760 + $2,400). 13 / 18 All of the following are carrying costs of inventory except : Storage costs Shipping costs Opportunity costs Insurance The cost of shipping inventory is a cost of acquiring, not carrying, it. 14 / 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? $120 $105 $115 $420 The cost of carrying a unit of inventory can be calculated as follows: ย Invoice price $400 + Freight and insurance on shipment 20 = Per-unit purchase cost $420 Times: cost of capital ร 25% = Opportunity cost $105 + Insurance on inventory 15 Per-unit carrying cost = $120 15 / 18 The level of safety stock in inventory management depends on all of the following except the : Level of uncertainty of the sales forecast Level of customer dissatisfaction for back orders Cost of running out of inventory Cost to reorder stock Determining the appropriate level of safety stock involves a complexprobabilistic calculation that balances the variability of demand for thegood, the variability in lead time, and the level of risk the firm iswilling to accept of having to incur stockout costs. Thus, the only one ofthe items listed that does not affect the level of safety stock is reorder costs. 16 / 18 The amount of inventory that a company would tend to hold in safety stock would increase as the : Cost of running out of stock decreases Cost of carrying inventory decreases Sales level falls to a permanently lower level Variability of sales decreases A firmโs economic order quantity is a function of demand, carrying costs,and ordering costs. A decrease in carrying costs permits a company to carrymore inventory at the same cost and thereby reduce stockout costs. 17 / 18 Using the economic order quantity (EOQ) model as part of its inventory control program, an increasein which one of the following variables would increase the EOQ? Ordering costs Carrying cost rate Safety stock level Purchase price per unit Fixed cost per order is in the numerator of the EOQ fraction. An increaseresults in an increase in the EOQ. 18 / 18 The result of the economic order quantity (EOQ) formula indicates the : Annual usage of materials during the year Safety stock plus estimated inventory for the year Annual quantity of inventory to be carried Quantity of each individual order during the year The EOQ model is a deterministic model that calculates the ideal order (orproduction lot) quantity given specified demand, ordering or setup costs,and carrying costs. The model minimizes the sum of inventory carryingcosts and either ordering or production setup costs. Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback automated inventory managementbest inventory management softwareInventory
