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Working Capital Management Exercise 2

This document contains 9 multiple choice questions related to inventory management, accounting, and finance concepts. Specifically, questions 1-5 are related to inventory management topics like carrying costs, economic order quantity, and reorder points. Questions 6-9 deal with accounting and finance topics such as spontaneous sources of financing, terms of trade discounts, and implicit interest rates.

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Nikki San Gabriel
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336 views

Working Capital Management Exercise 2

This document contains 9 multiple choice questions related to inventory management, accounting, and finance concepts. Specifically, questions 1-5 are related to inventory management topics like carrying costs, economic order quantity, and reorder points. Questions 6-9 deal with accounting and finance topics such as spontaneous sources of financing, terms of trade discounts, and implicit interest rates.

Uploaded by

Nikki San Gabriel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Question 1.

Which one of the following would not be considered a carrying cost associated with inventory?
A. Insurance costs.
B. Cost of capital invested in the inventory.
C. Cost of obsolescence.
D. Shipping costs.

Question 2.
Edwards Manufacturing Corporation uses the standard economic order quantity (EOQ) model.
If the EOQ for Product A is 200 units and Edwards maintains a 50-unit safety stock for the
item, what is the average inventory of Product A? 200/2 + 150 = 350

Question 3
Paint Corporation expects to use 48,000 gallons of paint per year costing P12 per gallon.
Inventory carrying cost is equal to 20% of the purchase price. The company uses its inventory
at a constant rate. The lead time for placing the order is 3 days, and Paint Corporation holds
2,400 gallons of paint as safety stock. If the company orders 2,000 gallons of paint per order,
what is the cost of carrying inventory? 2000/2 + 2400 = 3400
3400*2.4= 8160
12*20%= 2.4
Question 4
Assume that the following inventory values are determined to be appropriate for Louger Company:
Sales 1,000 units
Carrying costs 20% of inventory value
Purchase price P10 per unit
Cost per order P10
What is the economic order quantity (EOQ) for Louger?
squareroot of [(2*1000*10)/2]
= 100 units
Question 5
The following information regarding inventory policy was assembled by the JRJ Corporation.
The company uses a 50-week year in all calculations.
Sales 10,000 units per year
Order quantity 2,000 units 10k/ 50= 200
Safety stock 1,300 units 200 * 4= 800
800+1300= 2100
Lead time 4 weeks
The reorder point is

Question 6
In inventory management, the safety stock will tend to increase if the
A. Carrying cost increases.
B. Cost of running out of stock decreases.
C. Variability of the lead time increases.
D. Variability of the usage rate decreases
Question 7
Which one of the following provide a spontaneous source of financing for a firm?
A. Debentures
B. Accounts payable
C. Mortgage bonds
D. Preferred stock

Question 8
If a retailer’s terms of trade are 3/10, net 45 with a particular supplier, what is the cost on an
annual basis of not taking the discount? Assume a 360-day year.
(.03/97) * (360/35) = 31.81%
Question 9
Dudley Products is given terms of 2/10, net 45 by its suppliers. If Dudley forgoes the cash discount and
instead pays the suppliers 5 days after the net due date, what is the annual interest rate cost (using a
365-day year)? (.02/.98) * (365/40) = 18.62%

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