Deck 13: Inventory Management and Economic Order Quantity (EOQ) Analysis

Question 1

Safari Industries requires part XC-4 to manufacture one of its most popular products.Safari produces 32,000 units of this popular product each year, it costs Safari $12 per unit in holding costs, and order costs are $240.In order to minimize inventory costs, Safari wants to determine the economic order quantity and its total inventory costs if it implements EOQ. Safari's economic order quantity is approximately:

A)1,131.
B)800.
C)2,771.
D)3,919.
E)2,667.

Answer 1

A

Question 2

Inventory decisions involve a delicate balance between three classes of costs: ordering costs, advertising costs, and shipping costs.

Answer 2

False

Question 3

At the economic order quantity:

A)total annual inventory costs, holding costs, and ordering costs are all minimized.
B)total annual inventory costs and holding costs are minimized.
C)total annual inventory costs are minimized, and holding costs equal ordering costs.
D)total annual inventory costs are minimized, and holding costs exceed ordering costs.
E)total annual inventory costs are minimized, and ordering costs exceed holding costs.

Answer 3

C

Question 4

The EOQ model is a mathematical tool for determining the order quantity that maximizes the costs of ordering and holding inventory.

Question 5

Which of the following is classified as an inventory shortage cost?

A)Purchase order preparation.
B)Production disruption.
C)Lost sales and lost customers.
D)Spoilage.
E)Both production disruption and lost sales and lost customers.

Question 6

The key to the JIT system is the "pull" approach to controlling manufacturing.

Question 7

Inventory holding costs would typically include all of the following except:

A)insurance.
B)theft.
C)transportation.
D)obsolescence.
E)warehouse rent.

Question 8

Dazzle Graphics uses a special purpose paper on 80% of its jobs.The paper is purchased in 100- sheet packages at a cost of $100 per package.Management estimates that the cost of placing and receiving a typical order is $15, and the annual cost of carrying a package in inventory is $1.50. Dazzle uses 2,600 packages each year.Production is constant, and the lead time to receive an order is one week.(Assume 52 weeks in a year.) The reorder point is:

A)25 packages.
B)50 packages.
C)100 packages.
D)203 packages.
E)225 packages.

Question 9

Lagoon Enterprises uses an economic order quantity model and has determined an optimal order size of 500 units.Annual demand is 10,000 units, ordering costs are $50 per order, and holding costs are $4 per unit.The company's annual holding costs total:

A)$2,000.
B)$3,000.
C)$21,000.
D)$41,000.
E)None of the answers is correct.

Question 10

The EOQ approach takes the view that no inventory is necessary and can be acquired as needed.

Question 11

When considering safety stock and its effect on EOQ, which of the following statements is false?

A)Safety stock is equal to the potential excess usage of an input.
B)The reorder point is affected by the existence of safety stock.
C)Safety stock decreases inventory holding costs.
D)Safety stock decreases the potential costs caused by inventory shortages.
E)Fluctuations in monthly usage of a material indicate the desirability of a safety stock.

Question 12

Pika Pumps uses a special component in manufacturing its pool pumps.Pika produces 26,000 pool pumps per year, each of which requires one of these special components.The annual cost of holding one component is $4 and Pika's management estimates that the cost of placing and receiving a typical order is $125.Production is constant, and the lead time to receive an order is one week.Assume 52 weeks in a year. The reorder point is:

A)1,000 components.
B)500 components.
C)100 components.
D)225 components.
E)Not enough information is provided to determine the reorder point.

Question 13

When graphing the EOQ, which of the following statements is false?

A)Holding costs are a downward sloping line to the right.
B)The EOQ is represented by the minimum total cost.
C)Ordering costs are a downward sloping line to the right.
D)Average inventory on hand results in higher holding costs.
E)As order size increases, so does average inventory on hand.

Question 14

Pika Pumps uses a special component in manufacturing its pool pumps.Pika produces 26,000 pool pumps per year, each of which requires one of these special components.The annual cost of holding one component is $4 and Pika's management estimates that the cost of placing and receiving a typical order is $125.Production is constant, and the lead time to receive an order is one week.Assume 52 weeks in a year. Pika's economic order quantity is approximately:

A)456.
B)41.
C)1,275.
D)901.
E)1,803.

Question 15

Dazzle Graphics uses a special purpose paper on 80% of its jobs.The paper is purchased in 100- sheet packages at a cost of $100 per package.Management estimates that the cost of placing and receiving a typical order is $15, and the annual cost of carrying a package in inventory is $1.50. Dazzle uses 2,600 packages each year.Production is constant, and the lead time to receive an order is one week. The economic order quantity is approximately:

A)203 packages.
B)225 packages.
C)228 packages.
D)565 packages.
E)631 packages.

Question 16

Safari Industries requires part XC-4 to manufacture one of its most popular products.Safari produces 32,000 units of this popular product each year, it costs Safari $12 per unit in holding costs, and order costs are $240.In order to minimize inventory costs, Safari wants to determine the economic order quantity and its total inventory costs if it implements EOQ. Safari's total annual inventory cost is approximately: (Round your intermediate calculations to whole dollars.)

A)$1,600.
B)$6,960.
C)$20,532.
D)$13,512.
E)Not enough information is provided to determine the total annual inventory cost.

Question 17

Some of the ways that JIT efficiencies are achieved are through reducing the number of vendors, negotiating long-term supply agreements, making less frequent payments, and eliminating inspections.

Question 18

Inventory holding costs typically include:

A)clerical costs of purchase-order preparation.
B)costs of deterioration, theft, or spoilage.
C)costs associated with lost sales to customers.
D)forgone interest on money tied up in inventory.
E)both costs of deterioration, theft, or spoilage and forgone interest on money tied up in

Question 19

Which of the following does not minimize ordering costs when using JIT purchasing?

A)Reducing the number of vendors.
B)Negotiating long-term supply agreements.
C)Making less frequent payments.
D)Maintaining a safety stock.
E)Eliminating inspections.

Question 20

When comparing EOQ and JIT inventory systems, which of the following statements is false?

A)The EOQ approach takes the viewpoint that some inventory is necessary.
B)The EOQ system assumes a constant order quantity.
C)JIT argues that inventory investments should be minimized.
D)The EOQ system focuses on acquisition and holding costs.
E)JIT argues that safety stocks are necessary to reduce the probability of a stock shortage.

Question 21

The interest rate used when we discount a future cash flow to compute its present value is called the discount rate.

Question 22

Compound interest is interest earned on the interest earned in previous periods.

Question 23

A series of equivalent cash flows is called the accumulation factor.

Question 24

What is the disadvantage of using the tabular method to identify the economic order quantity?

Question 25

Consider the following items of information: I.The target recovery period. II.The discount rate. III.The timing (i.e., year) of a cash flow. Which of the above items would be needed to calculate the present value of a cash flow?

A)I only.
B)II only.
C)I and II.
D)II and III.
E)I, II, and III.

Question 26

You desire to invest $3,000 at the end of each year for the next five years to accumulate the funds needed for a down payment on a home.Which table factor(s) should be used to most efficiently determine the amount accumulated by the end of the five-year period?

A)Future value of $1.
B)Future value of a $1 annuity.
C)Present value of $1.
D)Present value of a $1 annuity.
E)Both Future value of $1 and Future value of a $1 annuity.

Question 27

Norton Company has a 12% compound annual interest rate.If the firm invests $60,000 today, how much will have accumulated by the end of eight years? Use appendix Table 1, Table 2, Table 3 and Table 4.

A)$117,600.
B)$148,560.
C)$298,080.
D)$738,000.
E)None of the answers is correct.

Question 28

All other things being equal, which of the following would be the most attractive to an investor?

A)A cash inflow of $10,000 in five years.
B)A cash inflow of $2,000 each year for the next five years.
C)A cash inflow of $5,000 in year 1 and $5,000 in year 5.
D)A cash inflow of $10,000 today.
E)All of these would be equally attractive to an investor.

Question 29

The main idea behind the time value of money is that:

A)cash flows received in the distant future are less valuable than cash flows received in the
B)cash received in year 3, say, $80,000, has the same value as $40,000 received in year 3
C)cash flows received in different years are treated as equal in value.
D)cash payments made in the future have the same value as payments made today.
E)timing considerations of cash flows have little value in decision making.

Question 30

You estimate that it will take five years to complete your college education.Your parents want to invest enough money today at an interest rate of 8% compounded annually to allow you to withdraw $10,000 at the end of each year for the next five years, with nothing left at the end.The amount of money to invest today is: Use appendix Table 1, Table 2, Table 3 and Table 4.

A)$14,690.
B)$34,050.
C)$39,930.
D)$50,000.
E)None of the answers is correct.

Question 31

Uncle Roscoe, a wealthy relative, has given you a choice of receiving $10,000 today or $3,000 at the end of each year for the next four years.Which table factor(s) should be used to most efficiently determine the "value" of the $3,000 cash-flow stream?

A)Future value of $1.
B)Future value of a $1 annuity.
C)Present value of $1.
D)Present value of a $1 annuity.
E)Both Present value of $1 and Present value of a $1 annuity.

Question 32

The fundamental concept in a capital-budgeting decision analysis is inflation.

Question 33

The procedure used to compute the present value of a series of cash flows is known as:

A)compounding.
B)the annuity method.
C)discounting.
D)the present-cost approach.
E)indexing.

Question 34

You are a sports agent who is representing Jack Lofton, a star football player, in contract negotiations with the New York Landmarks.The Landmarks have offered Lofton a four-year contract, with annual raises and performance bonuses that will result in a growing cash-flow stream for Lofton each year.Which table factor(s) should you use to most efficiently determine the "value" of the contract?

A)Future value of $1.
B)Future value of a $1 annuity.
C)Present value of $1.
D)Present value of a $1 annuity.
E)Both Present value of $1 and Present value of a $1 annuity.

Question 35

The factor applicable to individual cash flows in a series of equal cash flows is called the:

A)single-sum, present-value factor.
B)total discount factor.
C)accumulation factor.
D)compound discount factor.
E)internal rate discount factor.

Question 36

All other things being equal, which of the following would be most attractive to an investor?

A)A cash outflow of $60,000 in six years.
B)A cash outflow of $10,000 each year for the next six years.
C)A cash outflow of $30,000 in year 1 and $30,000 in year 6.
D)A cash outflow of $60,000 today.
E)All of these would be equally attractive to an investor.

Question 37

A series of equal cash flows is called a (n):

A)ongoing cash flow.
B)payback.
C)accrual.
D)cash accumulation.
E)annuity.

Question 38

The procedure used to compute the future value of a series of cash flows is known as:

A)compounding.
B)the annuity method.
C)discounting.
D)the future-cost approach.
E)indexing.

Question 39

Which of the following choices is closest to the amount of money that must be invested today in order to have $25,000 at the end of four years if the rate of return is 12% compounded annually? Use appendix Table 1, Table 2, Table 3 and Table 4.

A)$15,900.
B)$17,100.
C)$19,900.
D)$22,300.
E)None of the answers is correct.

Question 40

Lawson Company invests $60,000 today and has $148,560 by the end of eight years.What is the firm's compound annual interest rate? Use appendix Table 1, Table 2, Table 3 and Table 4.

A)10.00%.
B)12.00%.
C)18.45%.
D)40.39%.
E)None of the answers is correct.

Question 41

The Public Company Accounting Oversight Board (PCAOB) is a 7-member board operating under the auspices of the American Institute of Certified Public Accountants (AICPA).

Question 42

Larch West invested $71,030 in exchange for a series of $10,000 annual payments beginning one year from today.If the investment pays 10% interest, how many payments will Larch receive? Use appendix Table 1, Table 2, Table 3 and Table 4.

A)7.
B)13.
C)10.
D)12.
E)None of the answers is correct.

Question 43

Since many internal control procedures are automated, internal software controls are not needed.

Question 44

The first decade of the SOX legislation was characterized by controversy.

Question 45

The time value of money and present value are important business concepts. Required: Briefly explain these concepts to someone with a limited business background.

Question 46

You received a $5,000 loan at the end of each of your four years of college.Your grandparents agreed to pay off your loans at the end of your fourth year of school.Assume a 4% annual compound interest rate on student loans.Which of the following answers is the closest to the amount they will have to deposit when you start school so that they will have enough money to pay off your loans after four years? Their interest rate is 6% compounded annually. Use appendix Table 1, Table 2, Table 3 and Table 4.

A)$20,000.
B)$21,235.
C)$16,813.
D)$15,000.
E)None of the answers is correct.

Question 47

Lucas Sugar wants to accumulate funds to open his own restaurant after he graduates from culinary school and gains experience working in local restaurants.Lucas deposited $20,000 into a fund on January 2 of the current year.Lucas will be able to deposit $10,000 at the end of each of the next 5 years.If the fund pays 4% interest compounded annually, how much will Lucas have in his restaurant fund at the end of the 5th year? Use appendix Table 1, Table 2, Table 3 and Table 4.

A)$64,160.
B)$78,500.
C)$29,830.
D)$70,000.
E)$85,170.

Question 48

Nelson Company owes money to Nash Company for the purchase of equipment.Nash Company has given Nelson the following payment options: I.Immediate payment in full of $38,000. II.Annual payments of $15,000 made at the end of each of the next three years. III.A single payment of $48,000 made at the end of three years. Assume that both Nelson and Nash use a 10% interest rate compounded annually.What option would Nash prefer, and what is the present value of that option?

A)Option I, $34,542.
B)Option I, $38,000.
C)Option II, $37,305.
D)Option III, $34,164.
E)Option III, $36,048.

Question 49

Which of the following is a typical internal control?

A)The use of password-protected computers and software.
B)The requirement that separate individuals authorize cash disbursements and sign checks.
C)The use of physical controls over inventories to prevent loss from theft.
D)A physical count of inventory at year-end to verify amounts shown on the company's
E)All of the answers are correct.

Question 50

Jax Coolidge invested $58,830 today and will earn 8% on his investment.At the end of the investment's life, Jax will receive $160,000.How many years will Jax wait to receive $160,000? Use appendix Table 1, Table 2, Table 3 and Table 4.

A)3.
B)13.
C)4.
D)12.
E)None of the answers is correct.

Question 51

Elk Creek Industries (ECI) purchased equipment to expand its production facilities.The purchase agreement calls for annual payments of $60,000 at the end of each year for the next 6 years.If ECI's discount rate is 12%, at what amount should ECI record the equipment? Use appendix Table 1, Table 2, Table 3 and Table 4.

A)$360,000.
B)$231,300.
C)$331,540.
D)$246,660.
E)None of the answers is correct.

Question 52

Even in large companies, few internal controls exist in order to establish greater control of security among limited individuals.

Question 53

Green Company owes White Company money for the purchase of equipment.White has given Green the following payment options: I.Immediate payment in full of $38,000. II.Annual payments of $15,000 made at the end of each of the next three years. III.A single payment of $48,000 made at the end of three years. Green uses a 10% annual compound interest rate and will choose the option with the lowest present value.Which option should Green choose, and what is the present value of that option? Use appendix Table 1, Table 2, Table 3 and Table 4.

A)Option I, $34,542.
B)Option I, $38,000.
C)Option II, $37,305.
D)Option III, $34,164.
E)Option III, $36,048.

Question 54

The Sarbanes-Oxley Act established the:

A)Securities and Exchange Commission (SEC).
B)Public Company Accounting Oversight Board (PCAOB).
C)Financial Accounting Standards Board (FASB).
D)Institute of Management Accountants (IMA).
E)American Accounting Association (AAA).

Question 55

You received a $5,000 loan at the end of each of your four years of college.Aunt Rose agreed to pay off your loans at the end of your fourth year of school.How much will she have to pay? Assume a 4% interest rate compounded annually on student loans. Use appendix Table 1, Table 2, Table 3 and Table 4.

A)$20,000.
B)$21,235.
C)$39,930.
D)$50,000.
E)None of the answers is correct.

Question 56

You want to buy a new car in five years.You want to have saved $25,000 by then.You can invest $4,000 at the end of each of the next five years at an interest rate of 6% compounded annually.Will you have enough money at the end of the fifth year? Use appendix Table 1, Table 2, Table 3 and Table 4.

A)No.You are short $2,452.
B)Yes.You have $1,532 more than you need.
C)No.You are short $1,532.
D)Yes.You have $2,452 more than you need.
E)None of the answers is correct.

Question 57

The time value of money and present value are important business concepts. Required: Differentiate between the concepts discounting and compounding.

Question 58

The Sarbanes-Oxley Act:

A)arose because of several accounting scandals that rocked the public's confidence in
B)was enacted, in part, to bring about reform in companies' financial reporting processes.
C)has distinct guidelines for reporting on an organization's internal control practices.
D)contains provisions whereby the chief executive officer (CEO) and chief financial officer
E)All of the answers are correct.

Question 59

Internal controls focus on all of the following except:

A)effectiveness of operations.
B)reliability of financial reporting.
C)compliance with applicable laws and regulations.
D)maximization of profit and cash flows.
E)efficiency of operations.

Question 60

Olive Loom wants to accumulate $3,880 for a down payment toward the purchase of a car.Olive plans to make this purchase 3 years from today.If Olive can earn 8%, approximately how much does she need to deposit into the fund today in order to accumulate the desired down payment? Use appendix Table 1, Table 2, Table 3 and Table 4.

A)$3,080.
B)$4,890.
C)$925.
D)$3,258.
E)$2,915.

Question 61

The provisions of sections 302 and 404 of the Sarbanes-Oxley Act (as originally enacted) have proved especially troublesome for:

A)small businesses.
B)private universities.
C)cities and municipalities.
D)healthcare providers.
E)individual taxpayers.

Question 62

Section 404 of the Sarbanes-Oxley Act, Management Assessment of Internal Controls, includes all of the following except:

A)a statement of management's responsibility for establishing the internal control structure.
B)a waiver of auditor responsibility for assessing management's report on internal controls.
C)an assessment of the effectiveness of internal controls by management.
D)an assessment of the effectiveness of procedures for financial reporting by management.
E)a requirement that management include in its annual report an internal control report.

Question 63

Which of the following statements regarding the Sarbanes-Oxley Act is (are) true?

A)Management must establish and maintain a system of internal controls over financial
B)Management must periodically assess a company's system of internal controls over
C)Management must include in the company's annual report a separate report that assesses
D)A company's auditors are required to report on management's assessment of internal
E)All of the answers are correct.

Question 64

To achieve the objectives of sections 302 and 404 of the Sarbanes-Oxley Act, management and independent auditors should:

A)disclose the minutia of the internal control structure.
B)conduct a cost-benefit analysis prior to deciding whether or not to adopt these sections.
C)emphasize those areas where the greatest risk of fraud or material misstatement is likely to
D)analyze all financial transactions that are included in the reported financial statements.
E)work together to design the most effective internal control system.

Question 65

Which of the following is not a provision of (nor an outgrowth of) the Sarbanes-Oxley Act?

A)A public company's annual report must contain a separate disclosure that assesses the
B)Management is responsible for establishing and maintaining internal controls.
C)A company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO) can be held
D)A company must prepare a balance sheet, an income statement, a statement of
E)A new body, the Public Company Accounting Oversight Board, oversees and investigates

Question 66

Most of the Sarbanes-Oxley Act relates primarily to:

A)Corporate governance.
B)Financial accounting.
C)Auditing.
D)Court-invoked penalties for violating the law.
E)All of the answers are correct.

Question 67

The provisions of section 302 of the Sarbanes-Oxley Act (as originally enacted) require the signing officers of a company to do all of the following except:

A)audit the internal controls over financial reporting.
B)establish the internal controls over financial reporting.
C)maintain the internal controls over financial reporting.
D)evaluate the internal controls over financial reporting.
E)disclose material weaknesses in the internal controls over financial reporting.

Question 68

What does it mean to say that the concept of risk exposure may be the key to making SOX sections 302 and 404 more effective?

Question 69

Under section 404 of the Sarbanes-Oxley Act, auditors are required to:

A)attest to and report on the effectiveness of the client's internal controls.
B)establish and maintain internal controls for audited companies.
C)advise management on its preparation of the Report on Internal Controls.
D)evaluate the company's internal control system periodically throughout the year.
E)All of the answers are correct.

Question 70

Which of the following bodies oversees audits and auditors, and sanctions firms and individuals for violations of laws and regulations?

A)American Institute of Certified Public Accountants (AICPA).
B)American Accounting Association (AAA).
C)Public Company Accounting Oversight Board (PCAOB).
D)Financial Accounting Standards Board (FASB).
E)Accounting Principles Board (APB).

Question 71

Which of the following statements is false concerning computerized accounting systems?

A)Safeguards exist to make sure that controls are working properly.
B)There is no need for controls over human operators of computerized systems.
C)Computerized accounting systems are not 100% reliable.
D)Limits should be placed on who can access a computerized system.
E)Many internal control procedures are automated.