Question 1

Which two of the following are the key elements in determining the break-even default rate on a credit policy?

Accepted Answer

The answer of Which two of the following are the...

Question 2

Inventory needs under a derived-demand inventory system are:

Accepted Answer

Derived-demand inventory systems are based on the anticipated demand for the finished product. The inventory needs are determined by the production schedule and the demand for the final product. The inventory is restocked based on these needs, rather than on a set schedule or predetermined inventory level. Therefore, choice B is the correct answer. Choices A, C, D, and E are not accurate in describing the inventory needs under a derived-demand inventory system.

Question 3

Which one of the following inventory items is probably the most liquid?

Accepted Answer

Wheat stored in a grain silo is likely the most liquid inventory item as it can be sold quickly and easily on commodity markets, while the other items may take longer to sell or may have a limited market.

Question 4

A particular inventory manager orders items only in quantities that minimize inventory costs. What is this restocking quantity called?

Accepted Answer

The restocking quantity that minimizes inventory costs is known as the Economic Order Quantity (EOQ).

Question 5

Which one of the following statements is correct?

Accepted Answer

Firms may refuse additional credit to a delinquent customer as a way to mitigate their credit risk. This can also serve as a warning to the customer that future delinquent behavior will not be tolerated.

Question 6

Which one of the following items is most likely a derived-demand inventory item?

Accepted Answer

Tires held in inventory by a tractor manufacturer are most likely a derived-demand inventory item because they are a component that is required to manufacture the tractors, which are themselves the final product. The demand for tractors is derived from the demand for the goods that they help produce, such as crops, which is why the tires are considered derived-demand inventory.

Question 7

At the optimal order quantity size, the:

Accepted Answer

At the optimal order quantity size, the carrying costs (costs of holding inventory) are equal to the restocking costs (costs associated with ordering or producing more inventory). This balance minimizes the total inventory cost.

Question 8

On average, CT Motors has daily credit sales of $42,390, an inventory period of 53 days, and a collection period of 26 days. What is the average accounts receivable balance?

Accepted Answer

The answer of On average, CT Motors has daily credit...

Question 9

Which one of the following inventory-related costs is considered a shortage cost?

Accepted Answer

Shortage cost is the cost incurred due to the unavailability of the desired inventory that can lead to a loss of customer goodwill or lost sales. Therefore, option C, loss of customer goodwill, is the only option related to shortage cost.

Question 10

The incremental investment in receivables under the accounts receivable approach is equal to:

Accepted Answer

The incremental investment in receivables is the difference between the investment in receivables at the new credit policy (Q') and the investment in receivables at the old credit policy (Q), which is ν(Q' - Q). The investment in receivables at the new credit policy is PQ, so the incremental investment is PQ + ν(Q' - Q). Therefore, the correct choice is C.

Question 11

The accounts receivable approach to credit policy supports the theory that:

Accepted Answer

The accounts receivable approach to credit policy suggests that the primary risk a firm faces when offering credit to a new customer is the cost of the goods sold to that customer. If the customer fails to pay, the firm loses the cost of the items sold but not necessarily more than that, assuming it does not incur additional costs in attempting to collect the debt. This approach does not imply that receivables always lead to increased profits (D), that the cost of offering credit is the same for new and existing customers (C), that an all-cash policy is best (B), or that the default risk is the same under all policies (E).

Question 12

Which one of the following is a characteristic of a just-in-time inventory system?

Accepted Answer

A just-in-time inventory system relies on receiving supplies and materials from suppliers just in time to be used in the manufacturing process. This means that the system is highly dependent on the performance of suppliers to deliver materials on time and in the correct quantities.

Question 13

The ABC approach to inventory management is based on the concept that:

Accepted Answer

The ABC approach to inventory management is based on the concept that a small percentage of inventory items represents a large percentage of inventory cost. This approach categorizes inventory items into three groups: A, B, and C based on their value and importance. The A items are the most important and expensive, and therefore require close monitoring and control, while the C items are the least important and least expensive, and can be managed with less attention. This helps companies allocate their resources and focus their efforts on the items that are most critical to their operations.

Question 14

The EOQ model is designed to minimize:

Accepted Answer

The EOQ (Economic Order Quantity) model is designed to minimize the total costs of holding inventory, which includes both carrying costs and ordering costs.

Question 15

Which one of the following inventory items is probably the least liquid?

Accepted Answer

A partially assembled interior for a new vehicle would require specific customization for a particular make and model of vehicle, making it less likely to be sold quickly or easily. Plywood, a wheelbarrow, tires, and toys are all more generic items that could be sold to a broader market.

Question 16

The EOQ model is designed to determine how much:

Accepted Answer

The EOQ model (Economic Order Quantity) is designed to determine the optimal quantity of inventory that should be purchased at one time, in order to minimize total inventory costs (including ordering costs and holding costs) while ensuring that there is enough inventory to meet demand during lead time. Therefore, the correct choice is C - inventory should be purchased at one time.

Question 17

Turner's offers credit terms of net 30 with payments received an average of 2.8 days past their due date. Annual credit sales are $2.38 million. What is the average book value of accounts receivable? Assume a 365-day year.

Accepted Answer

The average book value of accounts receivable is equal to the average accounts receivable balance, which is equal to the annual credit sales multiplied by the average collection period. The average collection period is equal to the credit period plus the average delay in payment. The credit period is 30 days, and the average delay in payment is 2.8 days, so the average collection period is 32.8 days. The annual credit sales are $2.38 million, so the average accounts receivable balance is $2.38 million * 32.8 days / 365 days = $213,874.

Question 18

Allison has developed a set of procedures for determining the amount of each raw material she needs to have in inventory if she is to keep the assembly lines operating efficiently. These procedures are commonly referred to by which one of the following terms?

Accepted Answer

The set of procedures described in the question are commonly known as materials requirements planning (MRP), which involves calculating the amount of each raw material needed to meet production goals and ensure efficient operation of the assembly line. Option A refers to a method of inventory management, option B is a model for determining optimal inventory ordering quantities, option C refers to managing short-term assets and liabilities, and option D is a method for determining the optimal ordering quantity and timing for inventory.

Question 19

Music City has an average collection period of 34.6 days and an average daily investment in receivables of $71,407. What are the annual credit sales given a 365-day year?

Accepted Answer

Annual credit sales can be calculated using the formula:

Annual credit sales = Average daily credit sales x Number of days in a year

We need to first calculate the average daily credit sales by dividing the total investment in receivables by the average collection period:

Average daily credit sales = ($71,407) / (34.6 days) = $2,063.39

Now we can calculate the annual credit sales:

Annual credit sales = ($2,063.39) x (365 days) = $753,282

Therefore, the answer is (C) $753,282.

Question 20

A just-in-time inventory system:

Accepted Answer

A just-in-time inventory system focuses on meeting immediate production needs, and aims to only keep the necessary amount of inventory to fulfill orders without excess inventory. This helps reduce holding costs and improves efficiency in the production process. Therefore, option D is the correct choice. The other options are incorrect as they do not accurately describe the purpose or outcome of a just-in-time inventory system.

Quiz 20: Credit and Inventory Management