Question 1

All of the following are examples of carrying costs except

Accepted Answer

Shipping costs are not considered carrying costs. Carrying costs are the expenses associated with holding inventory, such as interest expense, warehouse space, insurance premiums, and handling costs.

Question 2

All of the following are methods of controlling receivables except

Accepted Answer

Reducing cash sales would not have an impact on controlling receivables since receivables are associated with credit sales, not cash sales. A, B, and C are all valid methods of controlling receivables. A cash discount can motivate customers to pay their bills faster. Reducing net terms shortens the time frame in which customers are expected to pay their bills. Using a credit scoring system like DBIS can help a company identify customers who are more likely to pay their bills on time and avoid extending credit to those who are not.

Question 3

If average daily remittances are $6 million, and "extended disbursement float" adds two days to the disbursement schedule, how much should the firm be willing to pay for a cash management system if the firm earns 7% on excess funds?

Accepted Answer

Annual return from cash management system = $6,000,000 × 2 days × 7% = $840,000

Question 4

Level production offers all of the following benefits except

Accepted Answer

Level production aims to produce at a steady rate to achieve maximum efficiency and reduce overtime usage by balancing production and demand. However, with higher use of capacity, there may be less storage space available as inventory is expected to be consumed rather than stored. Therefore, greater storage space is not a benefit of level production.

Question 5

The inventory decision model provides which type of information?

Accepted Answer

The inventory decision model provides the optimal order size for a given inventory system.

Question 6

The economic order quantity

Accepted Answer

The economic order quantity (EOQ) model assumes that the delivery times for each order are consistent. EOQ considers the trade-off between ordering costs and inventory holding costs to determine the optimal quantity to order. It does not explicitly consider stock-outs or seasonal inventory usage.

Question 7

Waldron Inc. is considering selling to a group of new customers that will bring in credit sales of $24,000 with a return on sales of 5%. The only new investment will be in accounts receivable. Waldron has a turnover ratio of 6 to 1 between sales and accounts receivable. What is Waldron Inc.'s expected return on investment?

Accepted Answer

Expected Accts Receivable = Credit Sales/Turnover = 24,000/6 = 4,000
Incremental ROI = (24,000 × 5%)/4,000 = 30%

Question 8

If a company can implement cash management systems and save three days by reducing remittance time and one day by increasing disbursement time based on $2,000,000 in average daily remittances and $2,500,000 in average daily disbursements and its return on freed-up funds is 10%, what is the maximum that it should spend on the system?

Accepted Answer

The company saves 3 days on remittances and 1 day on disbursements, freeing up funds for 4 days. The total funds freed up are (3 days * $2,000,000) + (1 day * $2,500,000) = $8,500,000. With a 10% return, the maximum to spend is 10% of $8,500,000, which is $850,000.

Question 9

All of the following are benefits of just-in-time inventory ordering systems except that JIT

Accepted Answer

JIT inventory ordering systems do not prevent stock outs, they aim to minimize inventory levels by ordering the right amount of inventory at the right time. However, if there are unexpected disruptions in the supply chain, stock outs can still occur. The other benefits mentioned (reduced warehouse space, utility and manpower costs, and inventory costs) are all common benefits of JIT systems.

Question 10

Modos Company has deposited $3,500 in checks received from customers. It has written $1,400 in checks to its suppliers. The initial bank and book balance was $600. If $1,600 of its customers' checks have cleared, but only $600 of its own, calculate its float.

Accepted Answer

Bank balance = $600 + $1.600 − $600 = $1,600
Book balance = $600 + $3,500 − $1,400 = $2,700
Float = $1,100

Question 11

A Just-In-Time (JIT) inventory management program has all but which of the following requirements?

Accepted Answer

A key tenet of JIT inventory management is to minimize inventory levels, which means that large safety stocks would not be a requirement. Instead, close ties between suppliers, manufacturers, and customers are necessary to ensure timely delivery of materials and products, and quality production is important to prevent errors and waste.

Question 12

Massa Machine Tool expects total sales of $60,000. The price per unit is $10. The firm estimates an ordering cost of $25 per order, with an inventory cost of $0.70 per unit. What is the optimum order size?

Accepted Answer

The answer of Massa Machine Tool expects total sales of...

Question 13

Price Corp. is considering selling to a group of new customers and creating new annual sales of $90,000. Five percent will be uncollectible. The collection cost on all accounts is 3% of new sales, the cost of producing and selling is 80% of sales, and the firm is in the 21% tax bracket. What is the profit on new sales?

Accepted Answer

First, calculate the net sales after accounting for the uncollectible 5%: $90,000 - (5% of $90,000) = $90,000 - $4,500 = $85,500. Next, subtract the collection cost, which is 3% of the original sales: 3% of $90,000 = $2,700. So, the amount after collection costs is $85,500 - $2,700 = $82,800. The cost of producing and selling is 80% of the original sales, which is $90,000 * 80% = $72,000. Subtract this from the amount after collection costs to get the gross profit: $82,800 - $72,000 = $10,800. Finally, calculate the net profit after taxes by subtracting 21% of the gross profit for taxes: $10,800 - (21% of $10,800) = $10,800 - $2,268 = $8,532.

Question 14

Cost savings from Just-In-Time (JIT) inventory management include(s)

Accepted Answer

Just-In-Time (JIT) inventory management involves the delivery of materials and goods at the exact time they are needed. This method avoids excess inventory, which incurs storage and maintenance costs, reduces the need for warehouse space, and lowers inventory financing costs by minimizing the amount of capital tied up in inventory. Moreover, by reducing the need for excess inventory, JIT inventory management can improve productivity by freeing up resources that would have been spent on managing excess inventory. Thus, all of the options- reduced overhead expenses, lower inventory financing costs, and greater productivity- are true with respect to cost savings from JIT inventory management.

Question 15

When using the economic order quantity model

Accepted Answer

The economic order quantity model aims to minimize the total cost of inventory, which includes carrying costs (the cost of holding inventory) and ordering costs (the cost of placing an order). The optimal order quantity occurs where the total carrying costs and total ordering costs are equal, resulting in the lowest total cost. Therefore, choice C is true. Choices A and B are incorrect because ordering costs and carrying costs do not necessarily increase or decrease as the level of inventory changes. Choice D is incorrect because one of the options is true.

Question 16

Warren Enterprises expects 20,000 unit sales, has ordering costs of $20 per order, carrying costs of $1.00 per unit, and desires to keep 100 units in safety stock. Assuming level production, what should be its average inventory?

Accepted Answer

The answer of Warren Enterprises expects 20,000 unit sales, has...

Question 17

Assuming that we can earn a 10% return on accounts receivable, which of the following strategies to finance an increase in our accounts receivable balance would be optimal?

Accepted Answer

Financing the increase in accounts receivable with a bank loan costing 8% is optimal because it is the lowest cost option compared to the returns of the other choices, and it allows earning a higher return of 10% on the accounts receivable.

Question 18

We expect that we can receive annual incremental income after taxes of $25,000, including an adjustment for uncollectible accounts. What is the maximum commitment to A/R that we should be willing to assume if our firm's minimum required after-tax return is 8%?

Accepted Answer

To find the maximum commitment to Accounts Receivable (A/R) that the firm should be willing to assume, we divide the annual incremental income after taxes by the firm's minimum required after-tax return rate. Thus, $25,000 / 0.08 = $312,500.

Question 19

Use of the economic order quantity

Accepted Answer

The economic order quantity calculation provides the lowest overall inventory costs by determining the optimal order quantity that balances inventory carrying costs and ordering costs. It does not directly determine the reorder point or safety stock, although these parameters can be considered when setting inventory policies based on the EOQ calculation.

Question 20

The amount of safety stock that a firm carries depends upon

Accepted Answer

The amount of safety stock that a firm carries depends upon the predictability of inventory usage and the time period necessary to fill inventory orders. If inventory usage is highly predictable and the lead time to order replenishments is short, then less safety stock needs to be on hand. However, if usage is unpredictable or the lead time is long, then more safety stock is needed to avoid stockouts. The riskiness of the storage facility may be a consideration, but it is not the primary factor in determining the amount of safety stock needed.

Quiz 7: Current Asset Management