MULTIPLE CHOICE QUESTIONS

1. Inventory holding costs typically include:

A. clerical costs of purchase-order preparation.
B. costs of deterioration, theft, or spoilage.
C. costs associated with lost sales to customers.
D. forgone interest on money tied up in inventory.
. items !B! And !D! a"ove.
Answer: #$: 1 %ype: &C
'. Inventory holding costs would typically include all of the following e(cept:
A. insurance.
B. theft.
C. transportation.
D. o"solescence.
. warehouse rent.
Answer: C #$: 1 %ype: &C
). At the economic order *uantity:
A. total annual inventory costs, holding costs, and ordering costs are all minimi+ed.
B. total annual inventory costs and holding costs are minimi+ed.
C. total annual inventory costs are minimi+ed, and holding costs e*ual ordering costs.
D. total annual inventory costs are minimi+ed, and holding costs e(ceed ordering costs.
. total annual inventory costs are minimi+ed, and ordering costs e(ceed holding costs.
Answer: C #$: 1 %ype: ,
-. Chan uses an economic order *uantity model and has determined an optimal order si+e of
.// units. Annual demand is 10,/// units, ordering costs are 112 per order, and holding
costs are 11.2/ per unit. Chan3s annual ordering and holding costs total:
A. 14//.
B. 11,)2/.
C. 14,4//.
D. 1'5,-2/.
. some other amount.
Answer: A #$: 1 %ype: A
6se the following to answer *uestions 2-.:
Cartwright 7raphics uses a special purpose paper in 0/8 of its 9o"s. %he paper is purchased in
1//-sheet pac:ages at a cost of 11// per pac:age. ;anagement estimates that the cost of placing
and receiving a typical order is 112, and the annual cost of carrying a pac:age in inventory is 11.2/.
Cartwright uses ',.// pac:ages each year. <roduction is constant, and the lead time to receive an
order is 1 wee:.
2. %he economic order *uantity is appro(imately:
A. '/) pac:ages.
B. ''2 pac:ages.
C. ''0 pac:ages.
D. 2.2 pac:ages.
. .)1 pac:ages.
Answer: C #$: 1 %ype: A
.. %he reorder point is:
88 Hilton, Managerial Accounting, Seventh Edition
A. '2 pac:ages.
B. 2/ pac:ages.
C. 1// pac:ages.
D. '/) pac:ages.
. ''2 pac:ages.
Answer: B #$: 1 %ype: A
5. =hen comparing $> and ?I% inventory systems, which of the following statements is false@
A. %he $> approach ta:es the viewpoint that some inventory is necessary.
B. %he $> system assumes a constant order *uantity.
C. ?I% argues that inventory investments should "e minimi+ed.
D. %he $> system focuses on ac*uisition and holding costs.
. ?I% argues that safety stoc:s are necessary to reduce the pro"a"ility of a stoc:
shortage.
Answer: #$: ' %ype: &C
EXERCISES
Implementation of EOQ; JIT
0. <ullman carries a part that is popular in the manufacture of automatic sprayers. Demand
for this part is -,/// units per yearA order costs amount to 1)/ per order, and holding costs
total 11.2/ per unit. <ullman currently places four orders per year with its suppliers.
;anagement is considering the implementation of an economic order *uantity model in an
eBort to "etter manage its inventories.
&e*uired:
A. Compute <ullman3s economic order *uantity.
B. Compute total annual inventory costs if <ullman follows the $> policy.
C. Cow much will the company save "y adopting the $> model@
D. BrieDy e(plain the philosophical diBerence "etween the $> model and the 9ust-in-time
model. =hich of the two models will li:ely result in lower holding costs for the Erm@
=hy@
#$: 1, ' %ype: &C, A
Answer:
A. %he $> can "e Egured "y ta:ing the s*uare root of: F' ( annual re*uirement ( cost per
orderG H annual holding cost per unit. %he s*uare root of F' ( -,/// ( 1)/G H 11.2/, or
1./,///, is -//.
B. %he ordering cost is "ased on 1/ orders F-,/// units H -// unitsG ( 1)/, and totals
1)//A the holding cost is computed on <ullmanIs average inventory of '// units F-// H
'G and amounts to 1)// F'// ( 11.2/G. %hus, costs at the $> total 1.// F1)// J
1)//G.
C. <ullman is currently ordering four times each year, resulting in order costs of 11'/ F1)/
( -G. ach order is for 1,/// units F-,/// H -G, which gives rise to an average inventory
of 2// units F1,/// H 'G and holding costs of 152/ F2// ( 11.2/G. %otal costs are 105/
F11'/ J 152/G, and the $> produces a 1'5/ savings for the Erm F105/ - 1.//G.
D. %he $> model assumes that some inventory is necessary for "usiness operations, and
the goal is to optimi+e the order *uantity to produce a situation where ordering costs
e*ual holding costs. In contrast, under ?I%, holding inventory in a warehouse is deemed
to "e ineKcient and wasteful. %hus, inventory should "e minimi+ed and even
eliminated, if possi"le.
89 Hilton, Managerial Accounting, Seventh Edition
Inventory under a ?I% system is typically lower and, thus, holding costs are lower with
this approach.

Appendix III 90