Deck 21: Management of Short-Term Assets: Inventory

Question 1

An example of a stockout cost for a manufacturer is:

A)disruption to the production process due to poor production planning.
B)storage costs of holding finished goods.
C)disruption of the production process due to raw material shortage.
D)opportunity costs of holding raw materials.

Answer 1

disruption of the production process due to raw material shortage.

Question 2

Consider the following data supplied by Cotton Tops,a t-shirt distributor:
Given that the manager charges equipment set-up costs as a separate cost to the purchase price of $4.92 per t-shirt,what is the economic order quantity?

A)10 000 units.
B)6500 units.
C)8667 units.
D)5200 units.

Answer 2

6500 units.

Question 3

ABC Ltd sells 12 000 rolls of films per year.The wholesale price is $3 per roll.The cost of processing each order to be placed with the wholesaler is $12.50 and carrying costs are 30 cents per roll per year.What is the EOQ?

A)750 rolls.
B)900 rolls.
C)1000 rolls.
D)1200 rolls.

Answer 3

1000 rolls.

Question 4

The opportunity to invest elsewhere rather than tie up capital in inventory is an example of:

A)a carrying cost.
B)a stockout cost.
C)an acquisition cost.
D)ordering costs.

Question 5

Consider the following data supplied by Cotton Tops,a t-shirt distributor:
The manager charges equipment set-up costs as a separate cost to the purchase price of $4.92 per t-shirt.Calculate the total inventory costs if the manufacturer offered Cotton Tops a 2 per cent quantity discount for orders of 10 000 or more and Cotton Tops' economic order quantity is 10 000 units.

A)$8625
B)$7395
C)$11 740
D)$13 260

Question 6

An example of stockout costs is:

A)the forgone opportunity to invest capital elsewhere rather than in inventory.
B)quantity discounts forgone.
C)storage costs.
D)lost business due to inventory shortages.

Question 7

Consider the following data supplied by Cotton Tops,a t-shirt distributor:
Calculate the reorder point if a two-week lead time is required for production and shipping.

A)3250 units.
B)2500 units.
C)1000 units.
D)6333 units.

Question 8

Consider the following data supplied by Cotton Tops,a t-shirt distributor:
Given that the manager charges equipment set-up costs as a separate cost to the purchase price of $4.92 per t-shirt,calculate how many orders will be placed per year.

A)2.6
B)3
C)5
D)4

Question 9

Which model assumes that demand for the product is constant and known with certainty?

A)The inventory quantity model.
B)The economic quantity model.
C)The certainty model.
D)The economic order quantity model

Question 10

Consider the following data supplied by Cotton Tops,a t-shirt distributor:
Calculate the reorder point if Cotton Tops ordered 1000 tops every two weeks and the delivery time was three weeks.

A)1250 units.
B)335 units.
C)500 units.
D)5000 units.

Question 11

DEF Ltd produces a specialised type of metal sheeting.Demand is 5 000 sheets per year.Each production run costs $1 750 to set up and storage costs are $25 per sheet per year.What is the optimal size of a production run?

A)873 sheets.
B)937 sheets.
C)837 sheets.
D)737 sheets.

Question 12

Consider the following data supplied by Cotton Tops,a t-shirt distributor:
Given that the manager charges equipment set-up costs as a separate cost to the purchase price of $4.92 per t-shirt,calculate the average investment in inventories per year.

A)$24 600
B)$16 000
C)$21 320
D)$12 792

Question 13

Consider the following data supplied by Cotton Tops,a t-shirt distributor:
Given that the manager charges equipment set-up costs as a separate cost to the purchase price of $4.92 per t-shirt,calculate the economic order quantity if sales increased by 100 per cent.

A)9195
B)13 000
C)14 500
D)10 400

Question 14

Consider the following data supplied by Cotton Tops,a t-shirt distributor:
Given that the manager charges equipment set-up costs as a separate cost to the purchase price of $4.92 per t-shirt,calculate total inventory costs.

A)$4000
B)$8000
C)$12 000
D)$7500

Question 15

Consider the following data supplied by Cotton Tops,a t-shirt distributor:
The manager charges equipment set-up costs as a separate cost to the purchase price of $4.92 per t-shirt.Calculate the savings/loss if Cotton Tops orders 5000 units at a time compared to 10 000 units at a time (assuming the discount only applies to orders of 10 000 units).

A)saving $1933.
B)loss $1933.
C)saving $2167.
D)loss $2167.

Question 16

ABC Ltd sells 12 000 rolls of films per year.The wholesale price is $3 per roll.The cost of processing each order to be placed with the wholesaler is $12.50 and carrying costs are 30 cents per roll per year.What is the optimal time period between orders?

A)Quarterly.
B)Monthly.
C)Daily.
D)Cannot be calculated as not enough information is provided.

Question 17

The costs of holding inventory are generally classified into three groups.The three groups are:

A)acquisition costs,carrying costs and stock costs.
B)acquisition costs,carrying costs and stockout costs.
C)acquisition costs,carrying costs and ordering costs.
D)acquisition costs,carrying costs and freight costs.

Question 18

Inventory management involves determining:

A)the right level of inventory that minimises the cost of carrying stock.
B)the right level of inventory that minimises carrying costs and reduces the chance of being out of stock.
C)the right level of inventory that minimises the possibility of losing customers due to no stock on hand.
D)the optimum level of inventory to satisfy customer demand.

Question 19

The economic order quantity refers to the:

A)quantity of inventory on hand that minimises the total cost of inventory.
B)inventory order quantity that minimises the total cost of inventory.
C)optimum time period between the placement of orders.
D)quantity of inventory on hand that minimises stockout costs.

Question 20

Which of the following is not a type of short-term asset held by businesses?

A)Inventory.
B)Plant,property and equipment.
C)Liquid assets.
D)Accounts receivable.

Question 21

Which of the following statements with regards to inventory management under uncertainty is true?

A)Stockouts may occur because the lead time for filling orders is usually positive.
B)If the lead time between placement of an order and its delivery is zero,the presence of uncertainty is a problem.
C)If the lead time between placement of an order and its delivery is zero,the presence of uncertainty is not a problem.
D)Stockouts may occur because the lead time for filling orders is usually positive and if the lead time between placement of an order and its delivery is zero,the presence of uncertainty is not a problem.

Question 22

Quantity discounts forgone refers to:

A)capital that could have been invested elsewhere in the company's activities instead of being tied up by inventory.
B)missing out on discounts by placing smaller orders.
C)the loss incurred if there is a decrease in the price of merchandise held in inventory.
D)the costs incurred by forgoing rental revenue.

Question 23

Which of the following statements is true?

A)The quantity decision is made by applying the uncertainty-based EOQ model.
B)The reorder point decision is made by applying the EOQ model.
C)The reorder point decision is made by adding a 'safety stock' when demand is uncertain.
D)The quantity decision is made by adding a 'safety stock' when demand is uncertain.

Question 24

Which of the following statements is true?

A)The optimal order quantity,Q*,is fairly sensitive to errors in estimates of unit costs,as demonstrated by the fact that Q* will increase by a factor of 2-squared if the acquisition cost,a,is doubled.
B)The optimal order quantity,Q*,is fairly sensitive to errors in estimates of unit costs,as demonstrated by the fact that Q* will increase by a factor of 2-squared if the carrying cost,c,is halved.
C)The optimal order quantity,Q*,is fairly insensitive to errors in estimates of unit costs,as demonstrated by the fact that Q* will increase by a factor of only 4-square-root if the acquisition cost,a,is doubled.
D)The optimal order quantity,Q*,is fairly insensitive to errors in estimates of unit costs,as demonstrated by the fact that Q* will increase by a factor of only 2-square-root if the acquisition cost,a,is doubled.

Question 25

Bounce Rubber Store sells 50 000 tyres per year.The wholesale price is $200 per tyre.The cost of processing each order to be placed with the wholesaler is $50 and carrying costs are $1 per tyre per year.What is the economic order quantity?

A)1118 tyres.
B)2236 tyres.
C)44.72 tyres.
D)2000 tyres.

Question 26

The cost of price movements refers to:

A)capital that could have been invested elsewhere in the company's activities instead of being tied up by inventory.
B)missing out on discounts by placing smaller orders.
C)the loss incurred if there is a decrease in the price of merchandise held in inventory.
D)the costs incurred by forgoing rental revenue.

Question 27

Which of the following statements is false?

A)A manufacturer that holds an inventory of its finished product incurs similar carrying costs to those faced by a retailer or a wholesaler.
B)A manufacturer that holds an inventory of its finished product incurs similar acquisition costs to those faced by a retailer or a wholesaler.
C)A manufacturer that holds an inventory of its finished product incurs similar stockout costs to those faced by a retailer or a wholesaler.
D)A manufacturer that holds an inventory of its finished product incurs similar carrying costs to those faced by a retailer or a wholesaler and a manufacturer that holds an inventory of its finished product incurs similar stockout costs to those faced by a retailer or a wholesaler.

Question 28

Which of the following statements is true?

A)The safety stock size approach based on stockout probability is more acceptable because it focuses on a relative measure.
B)The safety stock size approach based on stockout probability is quantified by calculating the ratio of sales to the level of orders.
C)The safety stock size approach,based on stockout probability,is quantified by calculating the ratio of sales to the level of orders,and expressing this ratio as a percentage.
D)None of the given options.

Question 29

Storage cost refers to:

A)capital that could have been invested elsewhere in the company's activities instead of being tied up by inventory.
B)missing out on discounts by placing smaller orders.
C)the loss incurred if there is a decrease in the price of merchandise held in inventory.
D)the costs incurred by forgoing rental revenue.

Question 30

Moors Manufacturing Ltd uses 5000 square metres of steel each year in its production process.Storage costs are $1 50 per square metre per year.Acquisition costs are $600 per order.What is the economic order quantity?

A)2000 square metres.
B)1500 square metres.
C)25 square metres.
D)1000 square metres.

Question 31

The opportunity cost of investment refers to:

A)capital that could have been invested elsewhere in the company's activities instead of being tied up by inventory.
B)missing out on discounts by placing smaller orders.
C)the loss incurred if there is a decrease in the price of merchandise held in inventory.
D)the costs incurred by forgoing rental revenue.

Question 32

The safety stock size approach based on the customer service level takes account of conditions:

A)throughout the lead time.
B)only at the end of the lead time.
C)only at the beginning of the lead time.
D)at the evaluation stage,which takes place prior to the lead time.

Question 33

Carrying costs:

A)increase as the order quantity increases.
B)decrease as the order quantity increases.
C)increase irrespective of whether the order quantity changes.
D)are not related to changes in the order quantity.

Question 34

A standard approach to inventory management under uncertainty is to:

A)add a 'safety stock' to the reorder point that would have been chosen under conditions of certainty.
B)double the economic order quantity.
C)deliberately reorder at a time when the current inventory level is exceeded by the quantity likely to be required during the lead time.
D)apply the certainty-based economic order quantity model.

Question 35

The 'just-in-time' system of inventory control can be best explained as the:

A)coordination of production processes so that raw materials and components are delivered to the location where they are needed at precisely the times they are required.
B)coordination of production processes so that raw materials and components are delivered to the location where they are needed.
C)process of minimising total inventory costs.
D)method in which the supplier effectively passes on the cost of inventory storage to the buyer.

Question 36

The level of acquisition costs incurred per year is equal to:

A)total acquisition costs multiplied by number of orders per year.
B)total acquisition costs multiplied by total inventory.
C)acquisition costs per order multiplied by number of orders per year.
D)acquisition costs per order multiplied by average inventory per order.

Question 37

Freight and handling costs are classified as:

A)carrying costs.
B)acquisition costs.
C)stockout costs.
D)carrying costs and acquisition costs.

Question 38

The level of carrying costs incurred per year is equal to:

A)total annual carrying cost multiplied by average inventory.
B)total annual carrying cost multiplied by total number of orders.
C)annual carrying cost per unit of inventory multiplied by average number of orders.
D)annual carrying cost per unit of inventory multiplied by average inventory.

Question 39

Bounce Rubber Store sells 50 000 tyres per year.The wholesale price is $200 per tyre.The cost of processing each order to be placed with the wholesaler is $50 and carrying costs are $1 per tyre per year.What is the optimal time period between orders?

A)22.36 days.
B)1.86 months.
C)3.73 months.
D)2.08 months.

Question 40

Super Furniture Ltd produces sofas.Demand is 6500 sofas per year.Each production run costs $2250 to set up.Storage costs are $42 per sofa per year.What is the optimal number of runs per year?

A)Eight runs per year.
B)Seven runs per year.
C)One run per year.
D)Two runs per year.

Question 41

A major reason that companies hold short-term assets is because markets are not frictionless.

Question 42

___________ includes raw materials,work in progress and finished goods not yet sold.

Question 43

Current assets are those assets that will normally be converted into cash within a ________.

Question 44

The economic order quantity model assumes that demand for a product increases with time.

Question 45

Australia Boxes sells 6000 boxes per year.The processing cost of each order is $10 and carrying costs are 50 cents per box per year.The optimal time period between orders for this company is bi-monthly.

Question 46

Which of the following statements is false?

A)Acquisition costs decline at a diminishing rate as the order size increases,irrespective of whether the order size is greater than the economic order quantity.
B)Carrying costs increase as the order size increases.
C)Total costs decline at a diminishing rate as the order size approaches the economic order quantity,beyond which they start to rise.
D)None of the given options.

Question 47

The matching principle involves matching the maturity structure of assets and liabilities to minimise the risk that a company will not have sufficient cash to meet liabilities as they fall due.

Question 48

__________ stock is additional inventory that is held when demand is uncertain,to reduce the probability of a stockout.

Question 49

Effective just-in-time operation requires:

A)short distances between suppliers and buyers.
B)carrying only a small amount of safety stocks.
C)the occasional delivery of large quantities of stock.
D)all of the given options.

Question 50

The relevant costs to be included in the economic order quantity model are __________ costs.

Question 51

The size of a company's 'safety stock' is usually dependant on the probability of a stockout occurring and the desired level of customer service the company seeks to provide.

Question 52

The ___________ system of inventory management is based on the concept that raw materials,equipment and labour are each supplied only in the amounts required and at the times required to complete the manufacturing task.