Inventory Management Quiz Managerial Accounting Quiz Share Inventory Management 18 questions in 30 minutes Pass Score 70% 1 / 18 The result of the economic order quantity (EOQ) formula indicates the : Safety stock plus estimated inventory for the year Annual quantity of inventory to be carried Annual usage of materials during the year 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. 2 / 18 All of the following are inventory carrying costs except : Insurance Opportunity cost of inventory investment Inspections Storage 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. 3 / 18 The level of safety stock in inventory management depends on all of the following except the : Level of customer dissatisfaction for back orders Cost to reorder stock Level of uncertainty of the sales forecast Cost of running out of inventory 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. 4 / 18 An inventory management technique designed to minimize inventory investment by having materialsarrive at the time they are needed for use is known as : The economic order quantity model (EOQ) Materials requirements planning (MRP) Just in time (JIT) First in first out (FIFO) 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 βjust intimeβ to be used in the production process. Inventory storage is considereda nonvalue adding activity, and raw materials on hand are thus kept to aminimum. 5 / 18 The amount of inventory that a company would tend to hold in safety stock would increase as the : Sales level falls to a permanently lower level Cost of carrying inventory decreases Cost of running out of stock decreases Variability of sales decreases A firmβs 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. 6 / 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? $2,400 $8,160 $5,280 $5,760 The companyβs per-gallon carrying cost is $2.40 ($12 purchase price pergallon Γ 20% carrying cost). The cost of carrying safety stock is $5,760(2,400 gallons Γ $2.40), and the cost of carrying average inventory is$2,400 (1,000 gallons Γ $2.40). Thus, total inventory carrying cost is$8,160 ($5,760 + $2,400). 7 / 18 All of the following are carrying costs of inventory except : Insurance Shipping costs Storage costs Opportunity costs The cost of shipping inventory is a cost of acquiring, not carrying, it. 8 / 18 Which one of the following is not explicitly considered in the standard calculation of economic orderquantity (EOQ)? Level of sales Carrying costs Quantity discounts Fixed ordering costs Quantity discounts are not a factor in the EOQ formula. 9 / 18 When the economic order quantity (EOQ) model is used for a firm that manufactures its inventory, ordering costs consist primarily of : Production set-up Obsolescence and deterioration Insurance and taxes Storage and handling A manufacturer can use the EOQ model by substituting production set-upcosts for ordering costs. Set-up costs are the manufacturerβs equivalent ofordering costs. The result is sometimes referred to as the economic batchquantity. 10 / 18 A major supplier has offered a corporation a year-end special purchase whereby it could purchase180,000 cases of sport drink at $10 per case. The corporation normally orders 30,000 cases permonth at $12 per case. The corporationβs cost of capital is 9%. In calculating the overall opportunitycost of this offer, the cost of carrying the increased inventory would be : $32,400 $40,500 $64,800 $81,000 If the corporation makes the special purchase of 6 months of inventory(180,000 cases Γ· 30,000 cases per month), the average inventory for the 6month period will be $900,000 [(180,000 Γ $10) Γ· 2]. If the specialpurchase is not made, the average inventory for the same period will be theaverage monthly inventory of $180,000 [(30,000 Γ $12) Γ· 2]. Accordingly,the incremental average inventory is $720,000 ($900,000 β $180,000), andthe interest cost of the incremental 6 month investment is $32,400[($720,000 Γ 9%) Γ· 2]. 11 / 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? Safety stock level Purchase price per unit Carrying cost rate Ordering costs Fixed cost per order is in the numerator of the EOQ fraction. An increaseresults in an increase in the EOQ. 12 / 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 $115 $420 $105 The cost of carrying a unit of inventory can be calculated as follows: Β Invoice price $400 + Freight and insurance on shipment 20 = Per-unit purchase cost $420 Times: cost of capital Γ 25% = Opportunity cost $105 + Insurance on inventory 15 Per-unit carrying cost = $120 13 / 18 The carrying costs associated with inventory management include : Obsolescence, set-up costs, capital invested, and purchasing costs Purchasing costs, shipping costs, set-up costs, and quantity discounts lost Insurance costs, shipping costs, storage costs, and obsolescence Storage costs, handling costs, capital invested, and obsolescence Carrying costs include storage costs, handling costs, insurance costs,interest on capital invested, and obsolescence. 14 / 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 : 2,700 units 1,200 units 5,500 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 Γ Lead time) + Safety stock Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β = [(12,000 units Γ· 50 weeks) Γ 5 weeks] + 1,500 units Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β = 1,200 units + 1,500 units Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β = 2,700 units 15 / 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 New competition may open in the companyβs 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. 16 / 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? 250 units 150 units 100 units 125 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) Γ· 2], or 150 units 17 / 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 : 420 units 500 units 580 units 509 units The lead times does not affect the EOQ; it just means the order should beplaced four days earlier. 18 / 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 model assumes constantly increasing usage over the year The EOQ results in the minimum ordering cost and minimum carrying cost 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. 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