Question 1

What is the financial manager's main concern with inventory management?

Accepted Answer

The financial manager's main concern with inventory management is the total cost of capital tied up in inventory. This is because inventory represents a significant investment of funds, and the financial manager must ensure that this investment is used efficiently.

Question 2

A larger inventory order quantity _____________ ordering costs but _____________ holding costs,assuming both are measured over a specific period of time.

Accepted Answer

Increasing the inventory order quantity will decrease ordering costs (since fewer orders need to be placed), but it will increase holding costs (since more inventory needs to be stored for a longer period of time). Therefore, the best choice is D, which states that a larger order quantity decreases ordering costs but increases holding costs.

Question 3

Focusing on the present value of total inventory-related cash flows instead of the amount of inventory investment indicates the managers' emphasis should be on

Accepted Answer

Focusing on the present value of total inventory-related cash flows indicates that all inventory-related expenses should be taken into account, including ordering costs, carrying costs, and stockout costs. This approach allows managers to make decisions that optimize overall inventory costs and maximize profitability. The inventory turnover ratio and economic order quantity are both useful metrics for managing inventory, but they do not provide a comprehensive view of inventory-related cash flows.

Question 4

Holding extra inventory to cushion against an unexpected increase in demand illustrates the _____________ motive.

Accepted Answer

The precautionary motive involves holding extra inventory as a precaution against unexpected events or emergencies like sudden rises in demand, supply chain disruptions, etc. This motive is used to ensure that the company has enough stock to meet customer demand and avoid stockouts. The other motives, such as speculative, transaction, and just-in-time, do not apply to this scenario.

Question 5

In the EOQ model,the inventory level at which an order should be placed is called

Accepted Answer

In the EOQ model, the inventory level at which an order should be placed is called the reorder point. This is the point at which the inventory level is equal to the expected demand during the lead time plus the safety stock level.

Question 6

The general manager of a steel mill is pretty sure that the demand for and price of steel will be increasing sharply within the next six months due to a sudden boom in the housing market.If he increases current production and inventories corresponding to his belief,his action would be indicative of the _____________ motive for holding inventory.

Accepted Answer

The general manager's decision to increase production and inventories based on his belief of a sharp increase in demand and price for steel in the next six months indicates speculative motive for holding inventory. This is because the decision is based on speculation or anticipation of future price increases, rather than a precautionary measure to mitigate risks or ensuring smooth operations (precautionary motive) or meeting current demand and supply requirements (transaction motive). The just-in-time motive involves holding minimal inventory to reduce waste and improve efficiency, which is not applicable in this scenario.

Question 7

A company's marketing manager is worried about ____________ stock-outs while production manger is concerned with _____________ stock-outs.

Accepted Answer

The marketing manager is concerned with finished goods stock-outs as it affects sales and customer satisfaction. The production manager is concerned with raw material and work-in-process stock-outs as they impact the production process and ability to meet demand.

Question 8

Restrictive assumptions used to develop and use the basic EOQ model include all of the following except:

Accepted Answer

The basic Economic Order Quantity (EOQ) model assumes a constant order cost per order, not a non-constant order cost. Other assumptions include a constant cost of holding each unit of inventory, a very accurate inventory demand forecast, and a constant rate of inventory usage.

Question 9

The valuation approach to making short-term financial decisions uses discounting to assess shareholder wealth effects.Using a cash flow timeline to assess various inventory purchase quantities is premised on an objective which should lead to enhanced shareholder wealth,which is

Accepted Answer

Since the valuation approach aims to assess the impact of short-term financial decisions on shareholder wealth, the objective should be to minimize the present value cost of inventory-related cash flows. This approach considers the time value of money and focuses on the impact of inventory decisions on future cash flows and ultimately shareholder value. Maximizing return on inventory investment or gross margin return could lead to short-sighted decisions that ignore the impact on future cash flows and profitability. Minimizing the sum of inventory holding and ordering costs may not necessarily result in the best decision for shareholder value.

Question 10

The ________________ motive for holding inventory links the level of inventory to ongoing anticipated demand.

Accepted Answer

The transaction motive for holding inventory is directly related to fulfilling anticipated demand. This motive is associated with ongoing operational activities that require inventory to maintain production and sales. The speculative motive is linked to taking advantage of potential price increases or shortages, while the precautionary motive is related to holding inventory as a buffer against unexpected events such as supply chain disruptions. Just-in-time is a inventory management approach that seeks to minimize inventory levels and optimize production processes.

Question 11

According to the assumptions upon which the EOQ model is based,total inventory costs _______________ with increases in the number of units ordered in each order.

Accepted Answer

The EOQ model assumes that total inventory costs first decrease as the number of units ordered increases (due to economies of scale and reduced ordering costs), but beyond a certain point, costs begin to increase due to higher holding costs.

Question 12

Inventory management is often viewed as the need to keep enough product on hand to avoid stock-outs,however the financial manager is concerned about:

Accepted Answer

The financial manager is concerned with earning a reasonable rate of return on invested capital. This means that they may want to limit the amount of inventory they hold in order to avoid tying up too much capital in inventory that is not being sold quickly enough. Additionally, holding too much inventory can lead to higher carrying costs and potentially obsolescence or spoilage of the goods.

Question 13

A company may wish to add a safety stock if it faces uncertain demand.The inventory analyst should modify the following in light of the safety stock:

Accepted Answer

Adding a safety stock means increasing the overall inventory level in order to buffer against uncertain demand. Therefore, both the average inventory and reorder point need to be adjusted by adding the safety stock amount. The EOQ formula does not need to be modified as it already considers the safety stock level as part of the total inventory required.

Question 14

Torque Manufacturing forecasts that its production will require 500,000 tons of bauxite over its planning period.Demand for Torque's products is stable over time.Ordering costs amount to an average of $20.00 per order.Holding costs are estimated at $1.25per ton of bauxite.EOQ for Torque is

Accepted Answer

To calculate EOQ, we need to use the following formula:

EOQ = sqrt((2DS)/H)

where

D = annual demand = 500,000 tons
S = ordering cost = $20.00 per order
H = holding cost = $1.25 per ton

Thus,

EOQ = sqrt((2 * 500,000 * 20)/1.25) = sqrt(1,600,000) = 1,264.91 tons

Therefore, the best choice is C, which is the closest option to the calculated EOQ of 1,265 tons.

Question 15

An automobile manufacturer has just decided to outsource windshields instead of making them itself.Using an outside supplier under the just-in-time approach will have what immediate effect on the manufacturer's inventory management?

Accepted Answer

Outsourcing windshields means the manufacturer no longer needs to store the raw materials for making windshields or manage the work in process inventory for windshields, thus reducing both raw material and work in process inventories.

Question 16

Given the demand for a company's inventoried items,the company typically experiences a trade-off between the ________________ and the _________________.

Accepted Answer

The trade-off mentioned in the question is between holding costs and ordering costs. Holding costs refer to the cost of holding inventory in stock (such as storage, insurance, etc.), while ordering costs refer to the cost of placing an order (such as administrative expenses, transportation costs, etc.). Therefore, option D, holding costs and ordering costs, best fits the sentence.

Question 17

The manufacturer of bicycles has just implemented a new sales forecasting model which is much more accurate than the "guesstimates" used in the past.The company should consequently

Accepted Answer

With the new, more accurate sales forecasting model, the manufacturer can better predict the demand for their bicycles. This means they can reduce their finished goods inventories to avoid excess inventory and the associated costs of carrying that inventory, such as storage and potential obsolescence. By reducing their finished goods inventories, the manufacturer can operate more efficiently and use its resources more effectively.

Question 18

The Farmingham Company faces very uncertain demand.A simple way of altering its EOQ-based inventory system to account for the uncertainty is to:

Accepted Answer

Adding a safety stock would be the best choice to account for uncertain demand. A safety stock is an additional quantity of inventory that is held to protect against stockouts caused by demand variability or lead-time variability. It acts as a buffer and ensures that the company has enough inventory to meet customer demand even during periods of high demand or unexpected fluctuations in demand. Increasing the size of every order or slowing production whenever sales trends change may not be feasible or efficient, and stocking only finished goods inventories may result in running out of stock for certain products. Therefore, adding a safety stock is the best option.

Question 19

The financial manager is trying to minimize the period's total inventory purchase costs.All other things held constant,the existence of quantity discounts on inputs would generally cause the company to order _________ quantity of those inputs,relative to the EOQ quantity.

Accepted Answer

Quantity discounts provide a reduced cost per unit if a higher quantity is purchased. As the financial manager is trying to minimize the period's total inventory purchase costs, they would take advantage of the quantity discounts by ordering a higher quantity than the EOQ quantity to achieve a lower cost per unit and ultimately decrease total inventory purchase costs.

Question 20

Which of the following is NOT one of the primary ways a company can reduce its inventory investment?

Accepted Answer

Expanding sales would increase demand for inventory, therefore it is not one of the primary ways to reduce inventory investment. Forecasting sales more accurately, finding more reliable suppliers, and eliminating bottlenecks in the production process are all effective ways to reduce inventory investment.

Quiz 4: Inventory Management