Deck 28: Advanced Issues in Cash Management and Inventory Control

Question 1

A just-in-time system is designed to stretch accounts payable as long as possible.

Answer 1

False

Question 2

Which of the following would cause average inventory holdings to decrease, other things held constant?

A) Fixed order costs double.
B) The purchase price of inventory items decreases by 50 percent.
C) The carrying price of an item decreases (as a percent of purchase price).
D) The sales forecast is revised downward by 10 percent.
E) Interest rates fall.

Answer 2

B

Question 3

(The following information applies to the next six problems.)
Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying costs is equal to 20 percent of the purchase price. (Assume a 360-day year.)
What is the economic ordering quantity for chips?

A) 12,088
B) 3,175
C) 6,243
D) 13,675
E) 8,124

Answer 3

B

Question 4

Once each year, B. Smith Inc. receives a $2 million payment. Of this amount, $700,000 is needed for cash payments made during the next year. Each time Smith deposits money in its account, a charge of $2.00 is assessed to cover clerical costs. If Smith can hold marketable securities which yield 5 percent, and then convert these securities to cash at a cost of only the $2 deposit charge, what is the total cost for one year of holding the minimum cost cash balance according to the Baumol model?

A) $7,483
B) $ 187
C) $3,741
D) $ 374
E) $ 748

Question 5

If a company increases its safety stock, then its average inventory will go up.

Question 6

If the lead time for placing an order is 5 days, and Aberwald holds a safety stock equal to a 30-day supply of chips, then at what inventory level should an order be placed?

A) 15,570
B) 3,175
C) 12,250
D) 13,675
E) 8,124

Question 7

If a company increases its safety stock, then its EOQ will go up.

Question 8

According to the Baumol model, what is the optimal transaction size for transfers from marketable securities to cash?

A) $ 7,071
B) $ 38,357
C) $ 70,711
D) $102,956
E) $ 87,000

Question 9

According to the Baumol model, what should be Norris' average cash balance?

A) $35,356
B) $ 3,536
C) $22,157
D) $70,711
E) $42,918

Question 10

For some firms, holding highly liquid marketable securities is a substitute for holding cash because a marketable securities portfolio can accomplish the same objective as cash.

Question 11

If Aberwald holds a safety stock equal to a 30-day supply of chips, what is its average inventory level?

A) 12,088
B) 3,175
C) 15,750
D) 13,675
E) 8,124

Question 12

Assume that Aberwald holds a safety stock equal to a 30-day supply of chips. What is the maximum amount of inventory that Aberwald will have on hand at any time, that is, what will be the inventory level right after a delivery is made?

A) 9,216
B) 3,175
C) 6,243
D) 13,675
E) 8,124

Question 13

Thoroughbred Industries has been practicing cash management for some time by using the Baumol model for determining cash balances. Some time ago, the model called for an average balance (C*/2) of $500; at that time, the rate on marketable securities was 4 percent. A rapid increase in interest rates has driven the interest rate up to 9 percent. What is the appropriate average cash balance now?

A) $200
B) $333
C) $414
D) $500
E) $666

Question 14

Williams Company's optimal cash transfer amount, using the Baumol model, is $60,000. The firm's fixed cost per cash transfer of marketable securities to cash is $180, and the total cash needed for transactions annually is $960,000. In addition, the total estimated cash costs (transfers and carrying cost) for the firm, based on 16 transactions per year, are $5,760. On what opportunity cost of holding cash was this analysis based?

A) 19.2%
B) 10.4%
C) 6.3%
D) 12.1%
E) 9.6%

Question 15

The cash balances of most firms consist of transactions, compensating, precautionary, and speculative balances. We can produce a total desired cash balance by calculating the amount needed for each purpose and then summing them together.

Question 16

Which of the following is true of the Baumol model? Note that the optimal cash transfer amount is C*?

A) If the fixed costs of selling securities or obtaining a loan (cost per transaction) increase by 20%, then C* will increase by 20%
B) If the total amount of cash needed during the year increases by 20%, then C* will increase by 20%.
C) If the average cash balance increases by 20%, then the total holding costs will increase by 20%.
D) If the average cash balance increases by 20% the total transactions costs will increase by 20%.
E) The optimal transfer amount is the same for all companies.

Question 17

The easier a firm's access to borrowed funds the higher its precautionary balances will be, in order to protect against sudden increases in interest rates.

Question 18

What will be the total cost to Norris of maintaining the optimal average cash balance, as determined by the Baumol model?

A) $35,356
B) $ 7,071
C) $18,493
D) $70,711
E) $53,190

Question 19

Which of the following is true of the EOQ model? Note that the optimal order quantity, Q, will be called EOQ.

A) If the fixed per order cost increases by 20%, then EOQ will increase by 20%
B) If the annual sales, in units, increases by 20%, then EOQ will increase by 20%.
C) If the average inventory increases by 20%, then the total carrying costs will increase by 20%.
D) If the average inventory increases by 20% the total order costs will increase by 20%.
E) The EOC is the same for all comppanies.

Question 20

Crystal Clear Company purchases 50,000 gallons of distilled water each year. Ordering costs are $100 per order, and the carrying cost, as a percentage of inventory value, is 80 percent. The purchase price to CCC is $0.50 per gallon. Management currently orders the EOQ each time an order is placed. No safety stock is carried. The supplier is now offering a quantity discount of $0.03 per gallon if CCC orders 10,000 gallons at a time. Should CCC take the discount?

A) From a cost standpoint, CCC is indifferent.
B) No, the cost exceeds the benefit by $500.
C) No, the cost exceeds the benefit by $1,000.
D) Yes, the benefit exceeds the cost by $500.
E) Yes, the benefit exceeds the cost by $1,120.

Question 21

(The following information applies to the next three problems.)
Assume that Fashion Clothiers Inc. uses 1,440,000 yards of material each year. Further, assume that Fashion can order the material at a cost of $2 per yard, plus fixed ordering costs of $100 per order. The firm's carrying cost is 20 percent of the inventory value, at cost.
What is the firm's EOQ?

A) 26,833
B) 30,040
C) 43,987
D) 13,563
E) 21,456

Question 22

Now, suppose the manufacturer offers a discount of 0.5 percent for orders of a least 40,000 yards. Should Fashion Clothiers increase its ordering quantity to take the discount?

A) Yes; it will save $827 if it takes the discount.
B) No; it will lose $827 if it takes the discount.
C) Yes; it will save $14,400 if it takes the discount.
D) Yes; it will save $13,573 if it takes the discount.
E) No; it will lose $13,573 if it takes the discount.

Question 23

If Aberwald holds a safety stock equal to a 30-day supply of chips, what is Aberwald's minimum cost of ordering and carrying inventory?

A) $28,500
B) $15,950
C) $68,440
D) $34,220
E) $47,693

Question 24

(The following information applies to the next three problems.)
Assume that Fashion Clothiers Inc. uses 1,440,000 yards of material each year. Further, assume that Fashion can order the material at a cost of $2 per yard, plus fixed ordering costs of $100 per order. The firm's carrying cost is 20 percent of the inventory value, at cost.
What is Fashion inventory? Clothiers' minimum
Costs of ordering and holding

A) $ 6,254
B) $10,733
C) $11,560
D) $13,563
E) $19,825