Deck 20: Inventory Management, Just-In-Time, and Simplified Costing Methods

Question 1

Answer the following questions using the information below:
The following information applies to Labs Plus, which supplies microscopes to laboratories throughout the country. Labs Plus purchases the microscopes from a manufacturer which has a reputation for very high quality in its manufacturing operation.

What is the reorder point?

A)1,040 units
B)857 units
C)1,560 units
D)2,080 units

Answer 1

B

Question 2

The costs that result when a company holds an inventory of goods for sale:

A)purchasing costs
B)carrying costs
C)opportunity costs
D)interest costs

Answer 2

B

Question 3

The costs of goods acquired from suppliers including incoming freight or transportation costs are:

A)purchasing costs
B)ordering costs
C)stockout costs
D)carrying costs

Answer 3

A

Question 4

Carrying costs arise when an organization experiences an ability to deliver its goods to its customers.

Question 5

The costs that result when features and characteristics of a product or service are NOT in conformance with the specifications are:

A)inspection costs
B)costs of quality
C)purchasing costs
D)design costs

Question 6

Retailers generally have a high percentage of net income to revenues.

Question 7

Shrinkage is measured by adding (a)the cost of the inventory recorded on the books in the absence of theft and other incidents just mentioned, and (b)the cost of inventory when physically counted.

Question 8

The costs that result when a company runs out of a particular item for which there is a customer demand are:

A)shrinkage costs
B)shortage costs
C)stockout costs
D)EOQ estimation costs

Question 9

Quality costs include:

A)purchasing costs
B)ordering costs
C)stockout costs
D)prevention costs

Question 10

The costs that result from theft of inventory are:

A)shrinkage costs
B)external failure costs
C)stockout costs
D)costs of quality

Question 11

Purchasing costs arise in preparing and issuing purchase orders, receiving and inspecting the items included in the orders, and matching invoices received, purchase orders, and delivery records to make payments.

Question 12

The opportunity cost of the stockout includes lost contribution margin on the sale NOT made plus any contribution margin lost on future sales due to customer ill will.

Question 13

All inventory costs are available in financial accounting systems.

Question 14

Shrinkage costs result from theft by outsiders, embezzlement by employees, misclassifications, and clerical errors.

Question 15

Sharing inventory data throughout the supply chain leads to more "rush" orders occurring.

Question 16

Obsolescence is an example of which cost category?

A)carrying costs
B)labor costs
C)ordering costs
D)quality costs

Question 17

Which of the following industries would have the highest cost of goods sold percentage relative to sales?

A)computer manufacturers
B)retail organizations
C)drug manufacturers
D)The percentage will usually depend on the success of a particular company.

Question 18

The costs of preparing, issuing, and paying purchase orders, plus receiving and inspecting the items included in orders is:

A)purchasing costs
B)ordering costs
C)stockout costs
D)carrying costs

Question 19

Managing inventories to increase net income requires companies to effectively manage costs associated with goods for sale.
Required:
Classify the below listed items as either Purchasing Costs, Ordering Costs, Carrying Costs, Stockout Costs, Costs of Quality, or Shrinkage Costs.

Question 20

Inventory management is the planning, organizing, and controlling activities that focus on the flow of materials into, through, and from the organization.

Question 21

Answer the following questions using the information below:
The following information applies to Labs Plus, which supplies microscopes to laboratories throughout the country. Labs Plus purchases the microscopes from a manufacturer which has a reputation for very high quality in its manufacturing operation.

What is the economic order quantity assuming each order was made at the economic-order-quantity amount?

A)15 units
B)20 units
C)780 units
D)1,040 units

Question 22

The purchase-order lead time is the:

A)difference between the times an order is placed and delivered
B)difference between the products ordered and the products received
C)discrepancies in purchase orders
D)time required to correct errors in the products received

Question 23

The economic order quantity ignores:

A)purchasing costs
B)relevant ordering costs
C)stockout costs
D)Both A and C are correct.

Question 24

Answer the following questions using the information below:
The following information applies to Labs Plus, which supplies microscopes to laboratories throughout the country. Labs Plus purchases the microscopes from a manufacturer which has a reputation for very high quality in its manufacturing operation.

If Brian Company has a safety stock of 320 units and the average daily demand is 20 units, how many days can be covered if the shipment from the supplier is delayed by 12 days?

A)24.0 days
B)20.0 days
C)16.0 days
D)13.4 days

Question 25

Answer the following questions using the information below:
The following information applies to Labs Plus, which supplies microscopes to laboratories throughout the country. Labs Plus purchases the microscopes from a manufacturer which has a reputation for very high quality in its manufacturing operation.

What are the annual relevant carrying costs, assuming each order was made at the economic-order-quantity amount?

A)$200
B)$1,000
C)$2,000
D)$6,000

Question 26

Answer the following questions using the information below:
The Wood Furniture company produces a specialty wood furniture product, and has the following information available concerning its inventory items:
Annual demand is 20,000 packages per year. The purchase price per package is $32.
What is the economic order quantity?

A)2,000,000 units
B)1,414.21 units
C)150,000 units
D)3,464.00 units

Question 27

Which of the following is an assumption of the economic-order-quantity decision model?

A)The quantity ordered can vary at each reorder point.
B)Demand ordering costs and carrying costs fluctuate.
C)There will be timely labor costs.
D)No stockouts occur.

Question 28

The EOQ model is solved using calculus but the key intuition is that relevant total costs are minimized when relevant ordering costs equal relevant carrying costs.

Question 29

If Jackson Collectibles, Inc. has a safety stock of 70 units and the average weekly demand is 14 units, how many days can be covered if the shipment from the supplier is delayed ?

A)5 days
B)35.days
C)42 days
D)70 days

Question 30

Answer the following questions using the information below:
The Wood Furniture company produces a specialty wood furniture product, and has the following information available concerning its inventory items:
Annual demand is 20,000 packages per year. The purchase price per package is $32.
The annual relevant total costs are at a minimum when relevant:

A)ordering costs are greater than the relevant carrying costs
B)carrying costs are greater than the relevant ordering costs
C)carrying costs are equal to relevant ordering costs
D)None of these answers is correct.

Question 31

Answer the following questions using the information below:
The Wood Furniture company produces a specialty wood furniture product, and has the following information available concerning its inventory items:
Annual demand is 20,000 packages per year. The purchase price per package is $32.
What are the relevant total costs at the economic order quantity?

A)$1,414.21
B)$4,242.65
C)$8,485.28
D)$9,000.00

Question 32

Answer the following questions using the information below:
The Wood Furniture company produces a specialty wood furniture product, and has the following information available concerning its inventory items:
Annual demand is 20,000 packages per year. The purchase price per package is $32.
How many deliveries will be required at the economic order quantity?

A)1.00 delivery
B)5.10 deliveries
C)7.07 deliveries
D)14.14 deliveries

Question 33

The Economic Order Quantity increases with demand and carrying costs and decreases with ordering costs.

Question 34

Which of the following statements about the economic-order-quantity decision model is FALSE?

A)It assumes purchasing costs are relevant when the cost per unit changes due to the quantity ordered.
B)It assumes quality costs are irrelevant if quality is unaffected by the number of units purchased.
C)It assumes stockout costs are irrelevant if no stockouts occur.
D)It assumes ordering costs and carrying costs are relevant.

Question 35

Relevant total costs in the economic-order-quantity decision model equal relevant ordering costs plus relevant:

A)carrying costs
B)stockout costs
C)quality costs
D)purchasing costs

Question 36

To determine the Economic Order Quantity, the relevant ordering costs are maximized and the relevant carrying costs are minimized.

Question 37

Answer the following questions using the information below:
The Wood Furniture company produces a specialty wood furniture product, and has the following information available concerning its inventory items:
Annual demand is 20,000 packages per year. The purchase price per package is $32.
What are the total relevant costs, assuming the quantity ordered equals 1,000 units?

A)$3,000
B)$500
C)$6,000
D)$9,000

Question 38

The simplest version of the Economic Order Quantity model incorporates only ordering costs, carrying costs, and purchasing costs into the calculation.

Question 39

The optimal safety stock level is the quantity of safety stock that minimizes the sum of the annual relevant:

A)stockout costs and carrying costs
B)ordering costs and carrying costs
C)ordering costs and stockout costs
D)ordering costs and purchasing costs

Question 40

The costs associated with storage are an example of which cost category?

A)quality costs
B)labor costs
C)ordering costs
D)carrying costs

Question 41

Answer the following questions using the information below:
Digital Goods is a distributor of DVDs. DVD Mart is a local retail outlet which sells blank and recorded DVDs. DVD Mart purchases tapes from Digital Goods at $10.00 per DVD; DVDs are shipped in packages of 25. Digital Goods pays all incoming freight, and DVD Mart does not inspect the DVDs due to Digital Goods' reputation for high quality. Annual demand is 208,000 DVDs at a rate of 4,000 DVDs per week. DVD Mart earns 15% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

What are the relevant total costs?

A)$5,697
B)$2,829
C)$8,029
D)$2,868

Question 42

Answer the following questions using the information below:
Short Grass Incorporated is a distributor of golf balls. Martin's Golf Supplies is a local retail outlet which sells golf balls. Martin's purchases the golf balls from Short Grass Incorporated at $0.75 per ball; the golf balls are shipped in cartons of 72. Short Grass Incorporated pays all incoming freight, and Martin's Golf Supplies does not inspect the balls due to Short Grass' reputation for high quality. Annual demand is 155,520 golf balls at a rate of 2,991 balls per week. Martin's Golf Supplies earns 12% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

If Martin's makes an order (1/12 of annual demand)once per month, what are the relevant total costs?

A)$1,500
B)$652.50
C)$2,152.50
D)$3,000.00

Question 43

For supply item ABC, Andrews Company has been ordering 125 units based on the recommendation of the salesperson who calls on the company monthly. A new purchasing agent has been hired by the company who wants to start using the economic-order-quantity method and its supporting decision elements. She has gathered the following information:
Required:
Determine the EOQ, average inventory, orders per year, average daily demand, reorder point, annual ordering costs, and annual carrying costs.

Question 44

Safety stock is used as a buffer against unexpected increases in demand, uncertainty about lead time, and unavailability of stock from suppliers.

Question 45

Answer the following questions using the information below:
Short Grass Incorporated is a distributor of golf balls. Martin's Golf Supplies is a local retail outlet which sells golf balls. Martin's purchases the golf balls from Short Grass Incorporated at $0.75 per ball; the golf balls are shipped in cartons of 72. Short Grass Incorporated pays all incoming freight, and Martin's Golf Supplies does not inspect the balls due to Short Grass' reputation for high quality. Annual demand is 155,520 golf balls at a rate of 2,991 balls per week. Martin's Golf Supplies earns 12% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

Purchasing at the EOQ recommended level, how many deliveries will be made during each time period?

A)2 deliveries
B)6.0 deliveries
C)7.91 deliveries
D)12 deliveries

Question 46

What are the major relevant costs in maintaining safety stock?

A)carrying costs and purchasing costs
B)ordering costs and purchasing costs
C)ordering costs and stockout costs
D)stockout costs and carrying costs

Question 47

The annual relevant carrying costs of inventory consists of the sum of the:

A)ordering costs and carrying costs
B)stockout costs and carrying costs
C)incremental costs plus the opportunity costs of capital
D)incremental costs plus the carrying costs

Question 48

Discuss considerations that should be fully taken into account when developing inventory related relevant costs for use in an economic order quantity (EOQ)model.

Question 49

Party Animals sells stuffed tigers. Products, Inc., manufactures many different stuffed animals. Party Animals orders 10,400 tigers per year, 200 per week, at $10 per tiger. The manufacturer covers all shipping costs. Party Animals earns 12% on its cash investments. The purchase-order lead time is 3 weeks. Party Animals sells 210 tigers per week. The following data are available (based on management's estimates): What is the economic order quantity using the estimated amounts?

A)119 stuffed tigers
B)223 stuffed tigers
C)273 stuffed tigers
D)325 stuffed tigers

Question 50

An inventory item of XYZ Manufacturing has an average daily demand of 10 units with a maximum daily demand of 12 units. The economic order quantity is 200 units. Without safety stocks, the reorder point is 50 units. Safety stocks are set at 94 units.
Required:
a. Determine the reorder point with safety stocks.
b. Determine the maximum inventory level.
c. Determine the average lead time.
d. Determine the maximum lead time.

Question 51

The reorder point is simplest to compute when:

A)both demand and purchase-order lead times are known with certainty
B)the number of units sold varies
C)the safety stock amount never varies
D)the relevant ordering costs and the relevant carrying costs are equal

Question 52

Answer the following questions using the information below:
Digital Goods is a distributor of DVDs. DVD Mart is a local retail outlet which sells blank and recorded DVDs. DVD Mart purchases tapes from Digital Goods at $10.00 per DVD; DVDs are shipped in packages of 25. Digital Goods pays all incoming freight, and DVD Mart does not inspect the DVDs due to Digital Goods' reputation for high quality. Annual demand is 208,000 DVDs at a rate of 4,000 DVDs per week. DVD Mart earns 15% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

What is the economic order quantity?

A)384 packages
B)475 packages
C)146 packages
D)196 packages

Question 53

Answer the following questions using the information below:
Short Grass Incorporated is a distributor of golf balls. Martin's Golf Supplies is a local retail outlet which sells golf balls. Martin's purchases the golf balls from Short Grass Incorporated at $0.75 per ball; the golf balls are shipped in cartons of 72. Short Grass Incorporated pays all incoming freight, and Martin's Golf Supplies does not inspect the balls due to Short Grass' reputation for high quality. Annual demand is 155,520 golf balls at a rate of 2,991 balls per week. Martin's Golf Supplies earns 12% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

Purchasing at the EOQ recommended level, what are the relevant total costs?

A)$1,500.00
B)$1,978.60
C)$989.37
D)$3,000.00

Question 54

Answer the following questions using the information below:
Digital Goods is a distributor of DVDs. DVD Mart is a local retail outlet which sells blank and recorded DVDs. DVD Mart purchases tapes from Digital Goods at $10.00 per DVD; DVDs are shipped in packages of 25. Digital Goods pays all incoming freight, and DVD Mart does not inspect the DVDs due to Digital Goods' reputation for high quality. Annual demand is 208,000 DVDs at a rate of 4,000 DVDs per week. DVD Mart earns 15% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

How many deliveries will be made during each time period?

A)86.7 deliveries
B)72.0 deliveries
C)138.0 deliveries
D)42.1 deliveries

Question 55

Video Images is a distributor of DVDs. Quick-Disk Mart is a local retail outlet which sells blank and recorded DVDs. Quick-Disk Mart purchases tapes from Video Images at $3.00 per DVD. DVDs are shipped in packages of 20. Video Images pays all incoming freight, and Quick-Disk Mart does not inspect the DVDs due to Video Images reputation for high quality. Annual demand is 104,000 DVDs at a rate of 4,000 DVDs per week. Quick-Disk Mart earns 20% on its cash investments. The purchase-order lead time is two weeks. The following cost data are available: What is the required annual return on investment per package?

A)$60.00
B)$2.50
C)$12.00
D)$0.60

Question 56

Due to unprecedented growth during the year, Flowers by Kelly decided to use some of its surplus cash to increase the size of several inventory order quantities that had been previously determined using an EOQ model.
Required:
Identify whether increasing the size of inventory orders will increase, decrease, or have no effect on each of the following items.

Question 57

Answer the following questions using the information below:
Short Grass Incorporated is a distributor of golf balls. Martin's Golf Supplies is a local retail outlet which sells golf balls. Martin's purchases the golf balls from Short Grass Incorporated at $0.75 per ball; the golf balls are shipped in cartons of 72. Short Grass Incorporated pays all incoming freight, and Martin's Golf Supplies does not inspect the balls due to Short Grass' reputation for high quality. Annual demand is 155,520 golf balls at a rate of 2,991 balls per week. Martin's Golf Supplies earns 12% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

What is the economic order quantity?

A)180 cartons
B)273 cartons
C)270 cartons
D)360 cartons

Question 58

The only product of a company has an annual demand of 4,000 units. The cost of placing an order is $20 and the cost of carrying one unit in inventory for one year is $4.
Required:
Determine the economic order quantity.

Question 59

Clothes, Inc., has an average annual demand for red, medium polo shirts of 25,000 units. The cost of placing an order is $80 and the cost of carrying one unit in inventory for one year is $25.
Required:
a. Use the economic-order-quantity model to determine the optimal order size.
b. Determine the reorder point assuming a lead time of 10 days and a work year of 250 days.
c. Determine the safety stock required to prevent stockouts assuming the maximum lead time is 20 days and the maximum daily demand is 125 units.

Question 60

Ralph was in the process of completing the quarterly planning for the purchasing department when a major computer malfunction lost most of his data. For direct material XXX he was able to recover the following:
Ralph purchases at the EOQ quantity level.
Required:
Determine the annual demand, the cost of placing an order, the annual carrying cost of one unit, and the economic order quantity.

Question 61

Just-in-time purchasing is guided solely by the economic order quantity.

Question 62

The ________ describes the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to consumers.

A)customer list
B)enterprise requirements plan (ERP)
C)material requirements plan (MRP)
D)supply chain

Question 63

A push-through system that manufactures finished goods for inventory on the basis of demand forecasts is referred to as:

A)just-in-time purchasing
B)materials requirements planning
C)relevant total costs
D)economic order quantity

Question 64

Just-in-time purchasing describes the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to consumers, regardless of whether those activities occur in the same organization or in other organizations.

Question 65

When using a vendor-managed inventory system to enhance the features of supply chain management, a challenging issue is:

A)problems of communication and trust
B)the sharing of accurate, timely, and relevant information about sales forecasts
C)potentially incompatible information systems
D)all of the above

Question 66

Increases in the carrying cost and decreases in the ordering cost per purchase order result in:

A)smaller EOQ amounts
B)larger EOQ amounts
C)larger relevant total costs
D)smaller relevant total costs

Question 67

Flashdrive Company sells 200 flash drives per week. Purchase-order lead time is 1-1/2 weeks and the economic-order quantity is 450 units. What is the reorder point?

A)200 units
B)300 units
C)750 units
D)1,125 units

Question 68

The executive vice president of Robotics, Inc., is concerned because the cost of materials has not been in line with the budget for several periods, even after implementing an EOQ model. The company has the normal direct material variance computations of price and efficiency at the end of each month. The price variance of the direct materials used is usually near expectations. The vice president does not understand how the budget differences are always larger than the material price variances.
Required:
What explanation can you give for the evaluation problems presented?

Question 69

What is a supply chain, and what are the benefits of a supply chain analysis? Provide an example of these benefits.

Question 70

The IBP Grocery orders most of its items in lot sizes of 10 units. Average annual demand per side of beef is 720 units per year. Ordering costs are $25 per order with an average purchasing price of $100. Annual inventory carrying costs are estimated to be 40% of the unit cost.
Required:
a. Determine the economic order quantity.
b. Determine the annual cost savings if the shop changes from an order size of 10 units to the economic order quantity.
c. Since the shelf life is limited, the IBP Grocery must keep the inventory moving. Assuming a 360-day year, determine the optimal lot size under each of the following: (1)a 20-day shelf life and (2)a 10-day shelf life.

Question 71

A conflict between the EOQ model's optimal order quantity and the order quantity the purchasing manager, evaluated on conventional accounting numbers, regards as optimal is considered a(n):

A)problem for the chief financial officer to resolve
B)problem for the performance evaluation system to resolve
C)goal congruence
D)opportunity cost

Question 72

Relevant opportunity cost of capital is the return forgone by investing capital in inventory rather than elsewhere.

Question 73

The annual relevant carrying costs of inventory consist of incremental costs plus the opportunity cost of capital.

Question 74

Just-in-time purchasing requires:

A)larger and less frequent purchase orders
B)smaller and less frequent purchase orders
C)smaller and more frequent purchase orders
D)larger and more frequent purchase orders

Question 75

Answer the following questions using the information below:
Owen-King Company sells optical equipment. Lens Company manufactures special glass lenses. Owen-King Company orders 5,200 lenses per year, 100 per week, at $20 per lens. Lens Company covers all shipping costs. Owen-King Company earns 30% on its cash investments. The purchase-order lead time is 2.5 weeks. Owen-King Company sells 125 lenses per week. The following data are available:

What is the reorder point?

A)220.5 lenses
B)312.5 lenses
C)397.5 lenses
D)415.5 lenses

Question 76

Answer the following questions using the information below:
Owen-King Company sells optical equipment. Lens Company manufactures special glass lenses. Owen-King Company orders 5,200 lenses per year, 100 per week, at $20 per lens. Lens Company covers all shipping costs. Owen-King Company earns 30% on its cash investments. The purchase-order lead time is 2.5 weeks. Owen-King Company sells 125 lenses per week. The following data are available:

What is the economic order quantity for Owen-King Company?

A)325 lenses
B)297 lenses
C)210 lenses
D)161 lenses

Question 77

Companies that implement JIT purchasing will switch their suppliers when another supplier offers a lower price.

Question 78

Wilson's Deli can predict with virtual certainty the demand for its products. Wilson's sells 30 hams per week. Purchase-order lead time is 3 weeks and the economic-order quantity is 75 hams. What is the reorder point?

A)30 hams
B)75 hams
C)90 hams
D)100 hams

Question 79

The manufacturing manager of New Technology Company is concerned about the company's newest plant. When the plant began operations three years ago, it had the best of everything. It had modern equipment, well-trained employees, engineered work and assembly stations, and a controlled environment. During the first two years, the evaluation results were very good with almost all cost variances being favorable. However, recently, things have turned negative.
In recent months, everything seems to be operating in a crisis management mode. Although most cost variances remain favorable, the plant's segment contribution is declining and customers are complaining about poor quality and slow delivery. Several customers have suggested that they may take their business elsewhere if things do not improve.
The shop floor is in continual turmoil. In-process inventory is everywhere, production employees have difficulty finding jobs that need to be worked on, and scheduling has requested a larger computer to keep track of work in process.
The vice president of sales does not know where to begin with solving the customers' problems. It seems that everyone is working very hard and the plant has the best facilities and trained employees in the industry.
Required:
What is the nature of the plant's problems? What recommendation would you make to help improve the situation?

Question 80

Video Boy has one particular product that has an annual demand of 2,000 units. Total manufacturing costs per unit total $20. Ordering costs for the product total $25 per purchase order. Currently, the carrying costs per unit are 25% of manufacturing costs.
Required:
Determine the economic manufacturing order quantity.