Deck 20: Inventory Cost Management Strategies

Question 1

Carrying costs arise when a customer demands a unit of product and that unit is not readily available.

Answer 1

False

Question 2

The annual relevant carrying costs of inventory consist of incremental costs plus the opportunity cost of capital.

Answer 2

True

Question 3

Shrinkage is measured by comparing the cost of inventory on the books to the cost of inventory physically counted.

Answer 3

True

Question 4

An important component in several of the cost categories which are not typically recorded in accounting systems is

A) labour costs.
B) opportunity costs.
C) ordering costs.
D) quality costs.
E) quantity costs.

Question 5

Purchasing costs consist of the costs of preparing and issuing a purchase order.

Question 6

All inventory costs are available in financial accounting systems.

Question 7

Expediting costs of a stockout include the additional ordering costs, plus any associated transportation costs.

Question 8

The reorder point is simplest to compute when either demand or lead time is certain.

Question 9

Shrinkage costs result from water damage to clothing and other soft goods.

Question 10

Purchasing costs generally include the freight and transportation costs on goods acquired from suppliers.

Question 11

Ordering costs consist of the costs of goods acquired from suppliers including freight and transportation costs.

Question 12

Inventory management is the planning, organizing, and controlling activities that focus on the flow of materials into, through, and from the organization.

Question 13

The economic-order-quantity decision model aids in the calculation of the optimal quantity of inventory to order.

Question 14

Costs associated with holding inventories and the resulting opportunity cost of the investment tied up in inventory fall into which of the following categories?

A) carrying costs
B) ordering costs
C) quality costs
D) stockout costs
E) stockin costs

Question 15

Safety stock is the buffer inventory held as a cushion against unexpected increases in demand or lead time, and unexpected unavailability of stock from suppliers.

Question 16

To determine the Economic Order Quantity, the relevant ordering costs are minimized and the relevant carrying costs are maximized.

Question 17

The Economic Order Quantity increases with demand and ordering costs and decreases with carrying costs.

Question 18

Costs incurred when preparing and issuing purchase orders are included in which of the following categories?

A) carrying costs
B) ordering costs
C) purchasing costs
D) stockout costs
E) stockin costs

Question 19

The annual relevant total costs are at a minimum where relevant ordering costs and their relevant carrying costs are equal.

Question 20

When retailers are uncertain about demand for their products or availability of their products from the suppliers, they often hold a fixed level of safety stock to make sure they will be able to fulfill the customers' needs.

Question 21

The following information has been gathered for Product A: What is the reorder point?

A) 38
B) 25
C) 30
D) 80
E) 100

Question 22

Use the information below to answer the following question(s).
Movie Time is a distributor of DVDs. Video Mart is a local retail outlet which sells blank and recorded DVDs. Video Mart purchases DVDs from Movie Time at $5.00 each; the units are shipped in packages of 25. Movie Time pays all incoming freight, and Video Mart does not inspect the DVDs due to Movie Time's reputation for high quality. Annual demand is 104,000 DVDs at a rate of 2,000 units per week. Video Mart earns 15% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

How many deliveries will be made during each time period?

A) 22.1 deliveries
B) 26.0 deliveries
C) 29.4 deliveries
D) 32.0 deliveries
E) 29.6 deliveries

Question 23

Use the information below to answer the following question(s).
Office Supply House purchases 4,160 reams of paper per year, ordered in lots of 80 reams per week at $150 per ream. The vendor covers all shipping costs. Office Supply House is not required to inspect the shipment upon entry. Office Supply House earns 20% on its cash investments. The purchase-order lead time is two weeks. The following cost data are available:

Disc Company sells 400 discs per week. Purchase-order lead time is 3 weeks and the economic-order quantity is 900 units. What is the reorder point?

A) 950 units
B) 1,200 units
C) 3,500 units
D) 4,500 units
E) 5,600 units

Question 24

The inventory that is held to offset unexpected increases in demand or lead time and unexpected unavailability of stock from suppliers is primarily known as

A) inventory stock.
B) over-supply stock.
C) safety stock.
D) surplus stock.
E) obsolete stock.

Question 25

Use the information below to answer the following question(s).
Movie Time is a distributor of DVDs. Video Mart is a local retail outlet which sells blank and recorded DVDs. Video Mart purchases DVDs from Movie Time at $5.00 each; the units are shipped in packages of 25. Movie Time pays all incoming freight, and Video Mart does not inspect the DVDs due to Movie Time's reputation for high quality. Annual demand is 104,000 DVDs at a rate of 2,000 units per week. Video Mart earns 15% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

What are the total relevant inventory costs?

A) $6,150.50
B) $4,182.56
C) $2.560.20
D) $1,951.70
E) $2,462.41

Question 26

Use the information below to answer the following question(s).
Office Supply House purchases 4,160 reams of paper per year, ordered in lots of 80 reams per week at $150 per ream. The vendor covers all shipping costs. Office Supply House is not required to inspect the shipment upon entry. Office Supply House earns 20% on its cash investments. The purchase-order lead time is two weeks. The following cost data are available:

The level of inventory which should trigger a new order is called

A) the customer demand level.
B) the supply equal demand level.
C) the stockout level.
D) the reorder point.
E) the inventory level.

Question 27

The total annual relevant cost equation, TRC, includes all of the following inputs EXCEPT

A) ordering costs per purchase order.
B) demand in units.
C) reorder point.
D) carrying cost per unit.
E) EOQ.

Question 28

Use the information below to answer the following question(s).
Office Supply House purchases 4,160 reams of paper per year, ordered in lots of 80 reams per week at $150 per ream. The vendor covers all shipping costs. Office Supply House is not required to inspect the shipment upon entry. Office Supply House earns 20% on its cash investments. The purchase-order lead time is two weeks. The following cost data are available:

What are the total relevant costs assuming the quantity ordered equals 80 reams?

A) $3,913.65
B) $3,948.50
C) $4,075.25
D) $4,165.00
E) $5,326.49

Question 29

Use the information below to answer the following question(s).
Office Supply House purchases 4,160 reams of paper per year, ordered in lots of 80 reams per week at $150 per ream. The vendor covers all shipping costs. Office Supply House is not required to inspect the shipment upon entry. Office Supply House earns 20% on its cash investments. The purchase-order lead time is two weeks. The following cost data are available:

How many deliveries will be required at the economic-order quantity level?

A) 17.7 deliveries
B) 36.5 deliveries
C) 41.6 deliveries
D) 52.3 deliveries
E) 18.9 deliveries

Question 30

The simplest version of the economic-order-quantity decision model assumes all of the following EXCEPT

A) the same fixed quantity is ordered at each reorder point.
B) demand ordering costs and carrying costs are certain.
C) purchase order lead time is certain.
D) no stockouts occur.
E) purchasing costs per unit depend on the quantity ordered.

Question 31

The following information has been gathered for Product A: What is the economic order quantity?

A) 9 units
B) 10 units
C) 20 units
D) 40 units
E) 46 units

Question 32

The following information has been gathered for Product A: What are the annual carrying costs if the company orders at the EOQ amount?

A) $80
B) $400
C) $1,520
D) $12,800
E) $16,000

Question 33

The purchase-order lead time is

A) the difference between the time an order is placed and delivered.
B) the difference between the products ordered and the products received.
C) the discrepancies in purchase orders.
D) the time required to correct errors in the products received.
E) the discrepancies in inventory sheets.

Question 34

Use the information below to answer the following question(s).
Movie Time is a distributor of DVDs. Video Mart is a local retail outlet which sells blank and recorded DVDs. Video Mart purchases DVDs from Movie Time at $5.00 each; the units are shipped in packages of 25. Movie Time pays all incoming freight, and Video Mart does not inspect the DVDs due to Movie Time's reputation for high quality. Annual demand is 104,000 DVDs at a rate of 2,000 units per week. Video Mart earns 15% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

What is the economic-order quantity?

A) 874 packages
B) 652 packages
C) 200 packages
D) 198 packages
E) 188 packages

Question 35

What are the major relevant costs in maintaining safety stock?

A) carrying costs and purchasing costs
B) ordering costs and purchasing costs
C) ordering costs and stockout costs
D) stockout costs and carrying costs
E) stockout costs and purchasing costs

Question 36

Use the information below to answer the following question(s).
Office Supply House purchases 4,160 reams of paper per year, ordered in lots of 80 reams per week at $150 per ream. The vendor covers all shipping costs. Office Supply House is not required to inspect the shipment upon entry. Office Supply House earns 20% on its cash investments. The purchase-order lead time is two weeks. The following cost data are available:

What is the economic-order quantity?

A) 324 reams
B) 235 reams
C) 114 reams
D) 100 reams
E) 110 reams

Question 37

Owen-King Company sells optical equipment. Lens Company manufactures special glass lens. Owen-King Company orders 5,200 lens per year, 100 per week at $20 per lens. Lens Company covers all shipping costs. Owen-King Company earns 30% on its cash investments. The purchase-order lead time is 2.5 weeks. Owen-King Company sells 125 lens per week. The following data is available: What is the economic-order quantity for Owen-King Company?

A) 325 lens
B) 297 lens
C) 210 lens
D) 161 lens
E) 92 lens

Question 38

Use the information below to answer the following question(s).
Office Supply House purchases 4,160 reams of paper per year, ordered in lots of 80 reams per week at $150 per ream. The vendor covers all shipping costs. Office Supply House is not required to inspect the shipment upon entry. Office Supply House earns 20% on its cash investments. The purchase-order lead time is two weeks. The following cost data are available:

What are the total relevant inventory costs at the economic-order quantity?

A) $3,913.65
B) $3,948.50
C) $4,975.86
D) $6,238.62
E) $4,862.84

Question 39

Which of the following statements is true?

A) The reorder point is the point at which the amount of inventory on hand equals the amount needed to cover sales during the lead time.
B) The reorder point is the minimum level of inventory allowed during a particular period.
C) The safety stock is the amount of stock that must be on hand to cover sales during lead time.
D) The safety stock is the minimum level of inventory that must remain on hand.
E) The safety stock is the minimum level of inventory that must remain at the customers.

Question 40

Owen-King Company sells optical equipment. Lens Company manufactures special glass lens. Owen-King Company orders 5,200 lens per year, 100 per week at $20 per lens. Lens Company covers all shipping costs. Owen-King Company earns 30% on its cash investments. The purchase-order lead time is 2.5 weeks. Owen-King Company sells 125 lens per week. The following data is available: What is the reorder point?

A) 220.5 lens
B) 312.5 lens
C) 397.5 lens
D) 415.5 lens
E) 561.9 lens

Question 41

Answer the following question(s) using the information below:
The Wood Furniture company produces a specialty wood furniture product, and has the following information available concerning its inventory items:
Annual demand is 10,000 packages per year. The purchase price per package is $16.
What is the economic order quantity?

A) 150,000 units
B) 1,000 units
C) 75,000 units
D) 5,000 units
E) 1,464 units

Question 42

Answer the following question(s) using the information below:
The Wood Furniture company produces a specialty wood furniture product, and has the following information available concerning its inventory items:
Annual demand is 10,000 packages per year. The purchase price per package is $16.
What are the total relevant costs, assuming the quantity ordered equals 500 units?

A) $3,500
B) $500
C) $4,000
D) $3,750
E) $3,350

Question 43

The only product of a company has an annual demand of 2,000 units. The cost of placing an order is $40
and the cost of carrying one unit in inventory for one year is $16.
Required:
Determine the economic order quantity.

Question 44

Bottle It has one particular product that has an annual demand of 1,000 units. Total manufacturing costs per unit total $40 and set-up costs per batch are $15. Direct material ordering costs for the product total $10 per order. Currently the carrying costs per unit are 25 percent of manufacturing costs.
Required:
Determine the economic manufacturing (order) quantity.

Question 45

Due to unprecedented growth during the year Denise's Flowers decided to use some of its surplus cash to increase the size of several inventory order quantities that had been previously determined using an EOQ model.
Required:
For each of the following items tell whether the action caused an increase, a decrease, or no change to the EOQ.
a. average inventory
b. cost of goods sold
c. number of orders per year
d. total annual carrying costs
e. total annual carrying and ordering costs
f. total annual ordering costs

Question 46

Answer the following question(s) using the information below:
The Wood Furniture company produces a specialty wood furniture product, and has the following information available concerning its inventory items:
Annual demand is 10,000 packages per year. The purchase price per package is $16.
Sandrington Ltd. operates a retail bicycle shop. Wheel covers are popular with customers. Sandrington purchases these covers for $48 (per pair) and expects to sell 5,000 pairs per year. Ordering costs are estimated at $180 per order and relevant insurance handling etc. costs are estimated at $0.30 per month. The company has established a 14% annual return on investment. At the EOQ quantity, Sandrington's total relevant inventory costs would be:

A) $2,546
B) $3,557
C) $735
D) $4,310
E) $6,467

Question 47

Answer the following question(s) using the information below:
The Wood Furniture company produces a specialty wood furniture product, and has the following information available concerning its inventory items:
Annual demand is 10,000 packages per year. The purchase price per package is $16.
How many deliveries will be required at the economic order quantity?

A) 1.0 delivery
B) 5.1 deliveries
C) 8.2 deliveries
D) 10.0 deliveries
E) 6.8 deliveries

Question 48

The EOQ model is designed to emphasize the tradeoff between which of the following factors?

A) carrying costs and ordering costs
B) purchasing costs and carrying costs
C) stockout costs and carrying costs
D) purchasing costs and ordering costs
E) stockout costs and ordering costs

Question 49

Answer the following question(s) using the information below:
Green Grass Incorporated is a distributor of golf balls. Garry's Golf Supplies is a local retail outlet which sells golf balls. Garry's purchases the golf balls from Green Grass Incorporated at $0.75 per ball; the golf balls are shipped in cartons of 72. Green Grass Incorporated pays all incoming freight, and Garry's Golf Supplies does not inspect the balls due to Green Grass' reputation for high quality. Annual demand is 172,800 golf balls at a rate of 3,322 balls per week. Garry's Golf Supplies earns 12% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

Purchasing at the EOQ recommended level, what are the relevant total costs?

A) $1,500.00
B) $2,085.67
C) $2,225.00
D) $3,000.00
E) $680.00

Question 50

Answer the following question(s) using the information below:
Green Grass Incorporated is a distributor of golf balls. Garry's Golf Supplies is a local retail outlet which sells golf balls. Garry's purchases the golf balls from Green Grass Incorporated at $0.75 per ball; the golf balls are shipped in cartons of 72. Green Grass Incorporated pays all incoming freight, and Garry's Golf Supplies does not inspect the balls due to Green Grass' reputation for high quality. Annual demand is 172,800 golf balls at a rate of 3,322 balls per week. Garry's Golf Supplies earns 12% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

What is the economic order quantity?

A) 200 cartons
B) 288 cartons
C) 300 cartons
D) 883 cartons
E) 218 cartons

Question 51

The economic-order quantity decision model

A) calculates the amount of inventory that may be purchased with the monetary constraint.
B) determines the minimum amount of inventory to purchase.
C) determines the maximum amount of inventory to keep on hand.
D) determines the optimal amount of inventory to order.
E) calculates the numbers of employees needed.

Question 52

Answer the following question(s) using the information below:
The Wood Furniture company produces a specialty wood furniture product, and has the following information available concerning its inventory items:
Annual demand is 10,000 packages per year. The purchase price per package is $16.
Sandrington Ltd. operates a retail bicycle shop. Wheel covers are popular with customers. Sandrington purchases these covers for $48 (per pair) and expects to sell 5,000 pairs per year. Ordering costs are estimated at $180 per order and relevant insurance handling etc. costs are estimated at $0.30 per month. The company has established a 14% annual return on investment. The EOQ quantity for Sandrington is:

A) 418 units
B) 506 units
C) 2,449 units
D) 707 units
E) 24 units

Question 53

Answer the following question(s) using the information below:
The Wood Furniture company produces a specialty wood furniture product, and has the following information available concerning its inventory items:
Annual demand is 10,000 packages per year. The purchase price per package is $16.
If Jackson Collectibles, Inc. has a safety stock of 35 units and the average weekly demand is 14 units, how many days can be covered if the shipment from the supplier is delayed?

A) 2.5 days
B) 17.5 days
C) 21 days
D) 35 days
E) 7.0 days

Question 54

Answer the following question(s) using the information below:
Green Grass Incorporated is a distributor of golf balls. Garry's Golf Supplies is a local retail outlet which sells golf balls. Garry's purchases the golf balls from Green Grass Incorporated at $0.75 per ball; the golf balls are shipped in cartons of 72. Green Grass Incorporated pays all incoming freight, and Garry's Golf Supplies does not inspect the balls due to Green Grass' reputation for high quality. Annual demand is 172,800 golf balls at a rate of 3,322 balls per week. Garry's Golf Supplies earns 12% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

If Garry's makes an order (1/12 of annual demand) once per month, what are the relevant total costs?

A) $1,500.00
B) $2,085.67
C) 2,225.00
D) $3,000.00
E) $680.00

Question 55

Berryton Products' only product has an annual demand of 1,000 units. The cost of placing an order is $20 and the cost of carrying one unit in inventory for one year is $10.
Required:
Determine the economic order quantity.

Question 56

Answer the following question(s) using the information below:
Green Grass Incorporated is a distributor of golf balls. Garry's Golf Supplies is a local retail outlet which sells golf balls. Garry's purchases the golf balls from Green Grass Incorporated at $0.75 per ball; the golf balls are shipped in cartons of 72. Green Grass Incorporated pays all incoming freight, and Garry's Golf Supplies does not inspect the balls due to Green Grass' reputation for high quality. Annual demand is 172,800 golf balls at a rate of 3,322 balls per week. Garry's Golf Supplies earns 12% on its cash investments. The purchase-order lead time is one week. The following cost data are available:

Purchasing at the EOQ recommended level, how many deliveries will be made during each time period?

A) 2.0 deliveries
B) 6.0 deliveries
C) 8.3 deliveries
D) 12 deliveries
E) 2.7 deliveries

Question 57

Answer the following question(s) using the information below:
The Wood Furniture company produces a specialty wood furniture product, and has the following information available concerning its inventory items:
Annual demand is 10,000 packages per year. The purchase price per package is $16.
What are the relevant total costs at the economic order quantity?

A) $1,000
B) $1,500
C) $3,000
D) $3,500
E) $2,050

Question 58

Answer the following question(s) using the information below:
The Wood Furniture company produces a specialty wood furniture product, and has the following information available concerning its inventory items:
Annual demand is 10,000 packages per year. The purchase price per package is $16.
Wilson's Deli can predict with virtual certainty the demand for its products. Wilson's sells 20 hams per week. Purchase-order lead time is 2 weeks and the economic-order quantity is 50 hams. What is the reorder point?

A) 20 hams
B) 30 hams
C) 40 hams
D) 50 hams
E) 100 hams

Question 59

Answer the following question(s) using the information below:
The Wood Furniture company produces a specialty wood furniture product, and has the following information available concerning its inventory items:
Annual demand is 10,000 packages per year. The purchase price per package is $16.
If Ferry Company has a safety stock of 160 units and the average daily demand is 20 units, how many days can be covered if the shipment from the supplier is delayed by 12 days?

A) 12.0 days
B) 10.0 days
C) 8.0 days
D) 6.7 days
E) 13.33 days

Question 60

Which of the following factor(s) would not cause a reduction in the EOQ?

A) long-run purchasing arrangements, fixing price and quality
B) electronic commerce
C) increasing use of purchase order cards
D) labour-intensive procurement methods
E) increase in carrying cost [C]

Question 61

Stanford Ltd. purchases 1,600,000 units of its product every year. The ordering costs are $50 per order and the annual carrying cost of one unit is $1.60. Under its current inventory policy, it purchases the units 80 times during the year (in batches of 20,000 units per order).
Required:
a. Calculate the EOQ for Stanford Ltd.
b. By ordering at the EOQ, how much in inventory costs will Stanford save per year?

Question 62

For supply item ABC, Andrews Company has been ordering 125 units based on the recommendation of the salesperson who calls on the company monthly. A new purchasing agent has been hired by the company who wants to start using the economic-order-quantity method and its supporting decision elements. She has gathered the following information:
Required:
Determine the EOQ, average inventory, orders per year, average daily demand, reorder point, annual ordering costs, and annual carrying costs.

Question 63

The IBP Grocery orders most of its items in lot sizes of 10 units. Average annual demand per side of beef is 720 units per year. Ordering costs are $25 per order with an average purchasing price of $100. Annual inventory carrying costs are estimated to be 40 percent of the unit cost.
Required:
a. Determine the economic order quantity.
b. Determine the annual cost savings if the shop changes from an order size of 10 units to the economic order quantity.
c. Since the shelf life is limited the IBP Grocery must keep the inventory moving. Assuming a 360-day year, determine the optimal lot size under each of the following: (1) a 20-day shelf life and (2) a 10-day shelf life.

Question 64

An inventory item of XYZ Manufacturing has an average daily demand of 10 units with a maximum daily demand of 12 units. The economic order quantity is 200 units. The reorder point is 50 units. Safety stocks are set at 94 units.
Required:
a. Determine the inventory level at the time of reordering.
b. Determine the purchase order lead time.
d. Determine the maximum purchase order lead time that the company can experience before it has a stockout.

Question 65

The annual demand for red, medium polo shirts, for Clothes, Inc. is 25,000 units. The cost of placing an order is $80, and the cost of carrying one unit in inventory for one year is $25.
Required:
a. Use the economic order quantity model to determine the optimal order size.
b. Determine the reorder point assuming a lead time of 10 days, and a work year of 250 days.
c. Assuming the maximum lead time is 20 days and the maximum daily demand is 125 units, determine the safety stock required to prevent stockouts.

Question 66

The possibility of a conflict between the order quantity that an EOQ model recommends and the order quantity that the purchasing manager regards as optimal is increased with

A) inventory costs which are computed with the FIFO method.
B) lower priced inventory items.
C) the absence of opportunity costs not being recorded in conventional accounting systems.
D) the absence of quality costs not being recorded in conventional accounting systems.
E) lower priced costs of goods sold.

Question 67

Hawthorne Ltd. purchases 1,500,000 units of its product every year. The ordering costs are $30 per order and the annual carrying cost of one unit is $1.60. Under its current inventory policy, it purchases the units 150 times during the year (in batches of 10,000 units per order).
Required:
a. What is the total cost per year of inventory under the current inventory policy?
b. Calculate the EOQ for Hawthorne Ltd.
c. What is the total annual cost of inventory under the EOQ purchasing policy?

Question 68

Acme Industries is currently experiencing problems with its inventory of anvils. Its manager, Willy Coy currently orders the anvils in batches of 10,000. Four orders are placed during the year to meet the estimated sales demand of 40,000 units. Each order costs $20 and each unit costs $2 to carry. Mr. Coy maintains a safety stock of 500 anvils.
Required:
b. What is the Economic Order Quantity for Acme Industries?
c. What is the average inventory if Acme uses the EOQ calculated in part b) and it still maintains its 500 units of safety stock?
d. What is Acme's annual savings in inventory costs by using the EOQ and maintaining its safety stock?

Question 69

Ralph was in the process of completing the quarterly planning for the purchasing department when a
major computer malfunction lost most of his data. For direct material XXX he was able to recover the
following:
Ralph purchases at the EOQ quantity level.
Required:
Determine the annual demand, the cost of placing an order, the economic order quantity and the annual total costs of inventory.

Question 70

If annual carrying costs are excluded when evaluating the performance of managers, the managers may favour purchasing in larger order quantities.

Question 71

Companies can achieve significant gains by sharing information and coordinating activities throughout the supply chain.

Question 72

Morrissette Ltd. sells 240,000 units a year. Its carrying costs are $0.10 per unit and its ordering costs are $187.50 per order.
Required:
a. Calculate the economic order quantity.
b. The supplier has offered a $0.02 discount per unit (on all units) if the order size is 80,000 units. Should Morrissette increase its order size?

Question 73

Goal-congruence problems may occur when an inconsistency evolves between the decision model used and the model used to evaluate the performance of the person implementing the decision.

Question 74

The costs associated with storage are an example of which cost category?

Question 75

You are the new controller at Ralston Industries and you have noticed that the company seems to carry a lot of inventory, both in direct materials and in finished goods. At a recent management meeting, you raised this observation. The managers agreed with your observation but stated that it was company policy to carry large inventories.
Required:
What reasons might these managers offer in support of carrying large inventories?

Question 76

When there is an inconsistency between the decision model and the model used to evaluate the performance of the person implementing the model, ________ arise.

A) evaluation point issues
B) goal-congruence issues
C) labour issues
D) performance issues
E) management issues

Question 77

A jeweller orders gems in lot sizes of 1,250 gems. The annual demand for emeralds is 6,250 gems. Ordering costs are $200 per order and carrying costs are $10 per unit annually.
Required:
a. Determine the economic order quantity.
b. Determine the amount of annual cost savings if the company changes from an order size of 1,250 units to the economic order size.
c. One supplier offers a discount of $2 per unit off the purchase price of orders in lots of 625 units or more. What impact would this have on the EOQ and should the order size be changed?

Question 78

Party Animals sells stuffed tigers. Products, Inc. manufactures all sorts of stuffed animals. Party Animals orders 10,400 tigers per year, 200 per week at $10 per tiger. The manufacturer covers all shipping costs. Party Animals earns 12% on its cash investments. The purchase order lead time is 3 weeks. Party Animals sells 210 tigers per week. The following data are available (based on management's estimates): What is the cost of the prediction error?

A) $19.58
B) $23.12
C) $1,144.82
D) $1,167.85
E) $1,237.92

Question 79

The annual demand for a company's product is 3,750 units, and monthly demand varies from 200 to 400 units with the following probability of demand:
200 units have a 25 percent probability
300 units have a 50 percent probability
400 units have a 25 percent probability
The EOQ model provides an optimal order quantity of 250 units. The opportunity costs of being out of stock are $2 per unit, with a carrying cost of $13 per unit, and the reorder point is 250 units.
Required:
a. Prepare a table showing stockouts, expected stockout costs, related carrying costs, and total costs, at each level of demand if the selected safety stocks are: 0, 50, 100 and 150.
b. What is the best level of safety stock to carry?

Question 80

The executive vice president of Robotics, Inc., is concerned because the cost of materials has not been in line with the budget for several periods, even after implementing an EOQ model. The company has the normal direct material variance computations of price and efficiency at the end of each month. The price variance of the direct materials used is usually near expectations. The vice president does not understand how the budget differences are always larger than the material price variances.
Required:
What explanation can you give for the evaluation problems presented?