University of Perpetual Help System laguna – Isabela Campus

Minante 1, Cauayan City, Isabela

College of Business and Accountancy

1st Semester, A.Y. 2018 – 2019

Preliminary Term
Quiz 3

Name: ________________________________________ Date: ___________

Course Year & Section: _____________________ Score: __________
Subject: _____________________________________

Instruction: Answer the following questions. Strictly NO ERASURES are allowed.

Multiple Choice Questions. Encircle the letter of your choice. show your solutions.

1. A company annually consumes 10,000 units of Part C. The carrying cost of this part is P2
per year and the ordering costs are P100. The company uses an order quantity of 500 units.
By how much could the company reduce its total costs if it purchased the economic order
quantity instead of 500 units?

A. P 500
B. P2,500
C. P2,000
D. P0
E. None of the above

2. King Corporation operates its factory 300 days per year. Its annual consumption of Material
Y is 1,200,000 gallons. It carries a 10,000 gallon safety stock of Material Y and its lead
time is 12 business days. What is the order point for Material Y?

A. 10,000 gallons
B. 48,000 gallons
C. 38,000 gallons
D. 58,000 gallons
E. None of the above

3. The following classes of costs are usually involved in inventory decisions except

A. Cost of ordering
B. Carrying cost
C. Cost of shortages
D. Machining cost
E. None of the above

4. The cost of insurance and taxes are included in

A. Cost of ordering
B. Set up cost
C. Inventory carrying cost
D. Cost of shortages
E. None of the above

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5. ‘Buffer stock’ is the level of stock

A. Half of the actual stock

B. At which the ordering process should start
C. Minimum stock level below which actual stock should not fall
D. Maximum stock in inventory
E. None of the above

6. The minimum stock level is calculated as

A. Reorder level – (Nornal consumption x Normal delivery time)

B. Reorder level + (Nornal consumption x Normal delivery time)
C. (Reorder level + Nornal consumption) x Normal delivery time
D. (Reorder level + Nornal consumption) / Normal delivery time
E. None of the above

7. Which of the following is true for Inventory control?

A. Economic order quantity has minimum total cost per order

B. Inventory carrying costs increases with quantity per order
C. Ordering cost decreases with lot size
D. All of the above
E. None of the above

8. The time period between placing an order its receipt in stock is known as

A. Lead time
B. Carrying time
C. Shortage time
D. Over time
E. None of the above

9. Re-ordering level is calculated as

A. Maximum consumption rate x Maximum re-order period

B. Minimum consumption rate x Minimum re-order period
C. Maximum consumption rate x Minimum re-order period
D. Minimum consumption rate x Maximum re-order period
E. None of the above

10. Average stock level can be calculated as

A. Minimum stock level + ½ of Re-order level

B. Maximum stock level + ½ of Re-order level
C. Minimum stock level + 1/3 of Re-order level
D. Maximum stock level + 1/3 of Re-order level
E. None of the above

11. The Economic Order Quantity (EOQ) is calculated as

A. (2D*S/h)^1/2
B. (DS*/h)^1/2
C. (D*S/2h)^1/2
D. (D*S/3h)^1/2
E. None of the above
Where, D=Annual demand (units), S=Cost per order, h=Annual carrying cost per unit

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12. If a decrease in unit prices causes the average demand rate to increase, which one of these
would not increase?

A. The EOQ.
B. Annual holding cost.
C. Lead time.
D. The ROP.
E. None of the above.

13. In the basic EOQ model, annual ordering cost and annual carrying cost are equal for the
optimal order quantity.

A. True
B. False

14. Inventory might be held to take advantage of order cycles.

A. True
B. False

15. Other things being equal, an increase in lead time for inventory orders will result in an
increase in the:

A. Order size
B. Reorder point
C. Order frequency
D. EOQ
E. None of the above

16. Set up costs are analogous to which one of these costs?

A. Shortage
B. Excess
C. Holding
D. Ordering
E. None of the above.

17. Using the basic EOQ model, if the ordering cost doubles, the order quantity will be

A. Double its former value

B. About 50% of its former value
C. About 71% of its former value
D. Unaffected
E. None of the above

18. If EOQ =40 units, order costs are P2 per order, and carrying costs are P.20per unit, what is
the usage in units?

A. 40
B. 80
C. 100
D. 160

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19. If EOQ = 1,000 units, order costs are P200 per order, and sales total 5,000 units, what is
the carrying cost per unit?

A. P.2
B. P2
C. P4
D. P8

20. Which of the following statements hold true for safety stock?

A. The higher the profit margin per unit, the lower the safety stock necessary.
B. The greater the risk of running out of stock, the larger the safety stock needed.
C. The lower the opportunity cost of the funds invested in inventory, the smaller the safety
stock needed.
D. The greater the uncertainty associated with forecasted demand, the lower the safety
stock needed.

21. The basic EOQ model ignores the purchasing cost.

A. True
B. False

22. Which of the following is not one of the assumptions of the basic EOQ model?

A. Annual demand requirements are known and constant.

B. Lead time does not vary.
C. Each order is received in a single delivery.
D. Quantity discounts are available.
E. All of the above are necessary assumptions.

23. Which of the following interactions with vendors would potentially lead to inventory
reductions?

A. reduce lead times

B. increase safety stock
C. less frequent purchases
D. larger batch quantities
E. longer order intervals

24. Which of the following is least likely to be included in order costs?

A. processing vendor invoices for payment

B. moving delivered goods to temporary storage
C. inspecting incoming goods for quantity
D. taking an inventory to determine how much is needed
E. temporary storage of delivered goods

25. The EOQ model is most relevant for which one of the following?

A. ordering items with dependent demand

B. determination of safety stock
C. ordering perishable items
D. determining fixed interval order quantities
E. determining fixed order quantities

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 26. Which one of the following items is not part of the fundamental JIT concept?

A. Right customer
B. Right place
C. Right quantities
D. Right components
E. Right time

27. In the context of a JIT manufacturing system, which of the following is not true?

A. Production line stoppages very quickly attract management attention

B. Additional advantage of low stock levels is that quality problems cannot be hidden
C. Minimizing inventory improves cash flow
D. Production line problems are put to one side and dealt with later

28. A just-in-time manufacturer is more likely than a conventional manufacturer to

A. receive more frequent deliveries of materials.

B. spend less money on advertising.
C. need workers with fewer skills.
D. all of the above.

29. Just-in-time relates to

A. people getting to their job location just in time to begin their work.
B. machinery placed in service just in time to begin production.
C. materials received from suppliers just in time for production needs.
D. all of the above.

30. In JIT manufacturing, each operation produces

A. only what is necessary for the succeeding operations

B. all that it can to offset fixed costs
C. a fixed percentage in excess of orders to ensure adequate quality stock
D. all that it can in order to build inventories

31. Conventional and just-in-time manufacturers differ in that the conventional manufacturer
is likely to

A. be a new entrant into its industry.

B. need less storage space than its JIT competitors.
C. give less credibility to management accounting reports.
D. have a longer production cycle than its JIT competitors.

Use the following information for questions 32 to 35:

The following information pertains to Ed Manufacturing Corporation’s Product X:
Annual demand 33,750 units
Annual cost to hold one unit of inventory P 15
Setup cost (or the cost to initiate a production run) P 500
Beginning inventory of Product X 0

At present, the company produces 2,250 units of Product X per production run, for a total of 15
production runs per year. The company is considering to use the EOQ model to determine the
economic lot size and the number of production runs that will minimize the total inventory carrying
cost and setup cost for Product X.

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 32. At present, the company’s total annual inventory costs is:

A. 7,500
B. 24,375
C. 16,875
D. 22,500

33. If the EOQ model is used, the economic lot size is:

A. 2,250 units
B. 2,250,000 units
C. 1,500 units
D. P 1,500

34. If the EOQ model is used, the number of production runs should be:

A. 15 runs
B. 67.5 runs
C. 1,500 units
D. 22.5 runs

35. If the EOQ model is used, the total annual inventory costs, compared with that under the
present system, will increase (decrease) by:

A. (1,875)
B. (5,625)
C. 3,750
D. 11,250

Use the following information for questions 36 to 39:

Camel Co. which has 250 business days per year, manufactures desks for desktop workstations.
The annual demand for the desks is estimated to be 5,000 units. The annual cost of carrying one
unit in inventory is P 10 and the cost to initiate a production run is P 1,000. Camel has scheduled
four equal production runs for the coming year, the first to begin immediately. Currently, there
are no desks on hand. Assume that sales occur uniformly throughout the year and that production
is instantaneous.

36. If Camel does not maintain a safety stock, the estimated total carrying costs for the desks
for the coming year is:

A. 5,000
B. 4,000
C. 6,250
D. 10,250

37. If Cantor were to schedule only two equal production runs of the desks for the coming year,
the sum of carrying costs and set up costs would increase (decrease) by:

A. 4,250
B. 6,250
C. (2,000)
D. ( 250)

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38. A safety stock for a five-day supply of desks would increase the number of units in Cantor’s
planned average inventory by:

A. 0
B. 100
C. 50
D. 250

39. Con Enterprises uses 84,000 units of Part 256 in manufacturing activities over a 300-day
work year. The usual lead-time for the part is six days, occasionally, however, the lead
time has gone as high as eight days. The company now desires to adjust its safety stock
policy. The safety stock size and the likely effect on stock-out costs and carrying costs,
respectively, would be:

A. 560 units, decrease, increase

B. 1,680 units, decrease, increase
C. 560 units, decrease, decrease
D. 1,680 units, increase, no change

40. Snobiz, Inc. has P2 million invested in Treasury bills yielding 8% per annum; this
investment will satisfy the firm's need for funds during the coming year. If it costs P50 to
sell these bills, regardless of the amount, how much should be withdrawn at a time?

A. P50,000
B. P250,000
C. P100,000
D. P500,000

41. Snobiz, Inc. has P2 million invested in Treasury bills yielding 8% per annum; this
investment will satisfy the firm's need for funds during the coming year. If Snobiz, Inc.
needs P167,000 a month, how frequently should the CFO sell off Treasury bills?

A. About every 3 days.

B. About every 15 days.
C. About every 9 days.
D. About every 18 days.

42. 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?

A. 250 units.
B. 150 units.
C. 125 units.
D. 100 units.

43. When the Economic Order Quantity (EOQ) model is used for a firm that manufactures its
inventory, ordering costs consist primarily of

A. Insurance and taxes.

B. Obsolescence and deterioration.
C. Storage and handling.
D. Production set-up.

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 44. A change from the FIFO (first-in, first-out) inventory valuation method to the LIFO (last-
in, first-out) method would

A. Increase the EOQ in times of rising prices.

B. Decrease the EOQ in times of rising prices.
C. Increase the EOQ in times of falling prices.
D. Not affect the EOQ.

45 - 50
Rudd Company uses 40,000 micro-chips each year in its production of digital cameras. The cost
of placing an order is P75. The cost of holding one unit of inventory for one year is P8. Currently
Rudd places 20 orders of 2,000 units per order.

45. Compute the annual ordering cost.

46. Compute the annual carrying cost.

47. Compute the total cost of Rudd's current inventory policy. 1,500 + 8,000 = 9,500

48. Compute the economic order quantity. 866

49. Compute the order cost and the carrying cost for the EOQ.

50. How much money does using the EOQ policy save the company over the policy of
purchasing 2,000 micro-chips per order?

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