Question 1

The optimal ordering quantity for a company is 350. If the carrying cost per item is $2.50 and the cost per order is $18, what is the number of total sales expected for the year?

Accepted Answer

Q* = 11ea7fdb_fc3e_a26b_a768_b9c520cecbc1_TB2902_11 350 = 11ea7fdb_fc3e_a26c_a768_29320b73ae10_TB2902_11 122,500 = 11ea7fdb_fc3e_a26d_a768_0f05db0f1ac9_TB2902_11 306,250 = 36 × S
S = 8,506.94

Question 2

Approximately how often should Jed's Supermarket order 20 oz. cans of Splat Spiced Possum if it expects to sell 5,000 cases per year, the ordering cost is $0.50 per order, and the carrying cost is $0.75/case?

Accepted Answer

Step 1 - Compute the optimal number of units per order.
Q* = 11ea7fdb_fc3f_17a1_a768_258898af34e2_TB2902_11 Q* = 11ea7fdb_fc3f_17a2_a768_37db5c6491ab_TB2902_11 Q* = 81.65
Step 2 - Use the optimal number of units per order to compute how often they should order. 11ea7fdb_fc3f_17a3_a768_3becc7d4e67f_TB2902_11 = 11ea7fdb_fc3f_17a4_a768_4138f690092f_TB2902_11 = 61.24

Question 3

Car-Quake Stereo plans to sell 500 bass boosters this year. If the carrying cost per unit is $1 and the cost per order is $25, what is the optimal number of units per order?

Accepted Answer

Q* = 11ea7fdb_fc3e_7b59_a768_8751529d2c4d_TB2902_11 Q* = 11ea7fdb_fc3e_7b5a_a768_d34c8d5beb22_TB2902_11 Q* = 158.11

Question 4

The primary reason for offering customers credit is to

Accepted Answer

The primary reason for offering customers credit is to stimulate sales by allowing customers to make purchases even if they don't have the cash on hand. While reducing the risk of nonpayment and increasing the predictability of cash flows may be benefits of offering credit, they are not the primary reason for doing so. Smoothing billing cycles and speeding cash flows may also be secondary benefits of offering credit, but they are not the primary reason for doing so.

Question 5

Each of the following is a decision that can be avoided if a firm refuses to offer credit EXCEPT:

Accepted Answer

Accounts payable refer to money owed by a firm to its suppliers for goods and services. It is not a decision that can be avoided by refusing to offer credit as it is a necessary part of doing business. The other options (collection period, discounts to fast payers, and who to extend credit to) all involve offering credit and can be avoided by refusing to offer credit.

Question 6

The minimum level of inventory a firm keeps on hand.

Accepted Answer

Safety stock is a minimum level of inventory a firm keeps on hand.

Question 7

As the number of units per order ________, total carrying costs ________.

Accepted Answer

Total carrying cost = CC × 11ea7fdb_fc3f_65c7_a768_f7b789e64d05_TB2902_11 Therefore, as Q increases, total carrying costs increase.

Question 8

Many industries offer trade credit so frequently, that failing to do so would result in failure. What is the real credit decision for companies in such industries?

Accepted Answer

The real credit decision for companies in such industries is to determine what terms to offer. Offering trade credit is often necessary for businesses to remain competitive and maintain good relationships with customers. However, it is important for companies to carefully consider the terms they offer, such as the length of the repayment period and any applicable interest charges, to ensure that they are able to collect payments in a timely manner and maintain a healthy cash flow. Choosing a collection company, obtaining credit for purchases, and determining the maximum credit to extend are all important considerations as well, but they are secondary to the decision of what terms to offer for trade credit.

Question 9

If credit terms are 2/30, net 60, what is the effective annual rate for a customer's loan when the customer pays the invoice in 60 days?

Accepted Answer

Step 1 - Compute the number of periods in a year.
60 - 30 = 30 days. 11ea7fdb_fc3f_b3ec_a768_8b7680230186_TB2902_11 = 12.167
Step 2 - Compute the percentage holding cost per period. 11ea7fdb_fc3f_dafd_a768_8fa3535db400_TB2902_11 = 0.02041
Step 3 - Compute the EIR.
EIR = 11ea7fdb_fc3f_dafe_a768_4df286f99da8_TB2902_11 - 1
EIR = 11ea7fdb_fc3f_daff_a768_1d627debbb34_TB2902_11 - 1
EIR = 0.2787 or 28%

Question 10

ABC Co. has an average inventory of 750. The carrying cost per item is 1.25, the ordering cost is $18 per order, and they make 28 orders per year. What is the total carrying cost for ABC Co?

Accepted Answer

To calculate the total carrying cost, we use the formula: 
Total Carrying Cost = Average Inventory * Carrying Cost per item

Total Carrying Cost = 750 * 1.25 = $937.50

Therefore, the best choice is B.

Question 11

Carrying costs per unit are $3.00. An average order contains 200 units. According to the economic order quantity model, what are total carrying costs?

Accepted Answer

Total carrying cost = CC × 11ea7fdb_fc3e_c97e_a768_15cc0810f468_TB2902_11 Total carrying cost = $3 × 11ea7fdb_fc3e_c97f_a768_bf24eb799eaf_TB2902_11 = $300

Question 12

The inventory method that relies on deliveries coming right before they are needed is:

Accepted Answer

Just-in-Time inventory method relies on deliveries coming right before they are needed, allowing for minimal inventory and reduced storage costs. The other options (Basket, LIFO, and FIFO) do not specifically relate to delivery timing.

Question 13

Inventory carrying costs include all of the following EXCEPT

Accepted Answer

Taking trade discounts actually reduces the inventory carrying cost, as it reduces the amount of financing needed to purchase the inventory. Therefore, it is not included in the inventory carrying cost.

Question 14

If a firm uses the EOQ model to manage its inventory and its managers decide to hold safety stock, its

Accepted Answer

EOQ assumes inventor will hit 0 before re-ordering. Adding safety stock will increase the first order.

Question 15

Which type of firm would benefit the most from a "basket" type of inventory management system?

Accepted Answer

The basket approach may be appropriate for low value inventory items or when inventory represents a very small part of the firm's assets.

Question 16

The cost of obsolescence, damage, and theft is considered part of:

Accepted Answer

The cost of obsolescence, damage, and theft are all factors considered in carrying costs, which are the expenses associated with holding inventory. Shortage costs refer to the cost of running out of inventory, opportunity costs refer to the lost potential revenue from not being able to sell a product, and insurance costs specifically refer to expenses related to insuring inventory against loss or damage.

Question 17

A company has predicted annual sales of 2500 units, an ordering cost of $35, and a carrying cost of $1.75 per unit. How many orders should they make this year?

Accepted Answer

Using the Economic Order Quantity (EOQ) formula, we can calculate the optimal order size as follows: 
EOQ = sqrt((2*2500*35)/1.75) 
EOQ ≈ 177.83 
Since we need to know the number of orders, we can divide the total number of units (2500) by the EOQ: 
2500/177.83 ≈ 14.07 
Rounding up to the nearest whole number gives us a total of 15 orders. Therefore, the best choice is C (7.91 is not a valid answer option).

Question 18

Optimal credit policy is one in which the

Accepted Answer

The optimal amount of credit is where cost of receivables = revenues from increased sales.

Question 19

All of the following are costs of credit EXCEPT

Accepted Answer

The costs of credit include bad debt losses, credit analysis expenses, and the increased investment in accounts receivable. However, lost revenues when customers do not take advantage of trade discounts are not considered to be a cost of credit, as it is a lost opportunity for revenue rather than a direct expense.

Question 20

The order cost per order is $10. Expected sales are 500,000 units and 20,000 units are in each order. What is the total order cost?

Accepted Answer

Step 1 - Compute the number of times they order. 11ea7fdb_fc3f_3eb5_a768_b383e660b508_TB2902_11 = 11ea7fdb_fc3f_3eb6_a768_237eca92a95b_TB2902_11 = 25
Total order cost is the number of times they order multiplied times the cost of each order:
25 × $10 = $250

Quiz 15: The Management of Working Capital