29.

Which of the following industries would have the highest cost of goods sold percentage
relative to sales?
a. computer manufacturers
b. retail organizations
c. drug manufacturers
d. The percentage will usually depend on the success of a particular company.

Answer: b Difficulty: 2 Objective: 1

Terms to Learn: inventory management

30. The costs of goods acquired from suppliers including incoming freight or transportation
costs are:
a. purchasing costs
b. ordering costs
c. stockout costs
d. carrying costs

Answer: a Difficulty: 2 Objective: 1

Terms to Learn: purchasing costs
31. The costs of preparing, issuing, and paying purchase orders, plus receiving and
inspecting the items included in orders is:
a. purchasing costs
b. ordering costs
c. stockout costs
d. carrying costs

Answer: b Difficulty: 2 Objective: 1

Terms to Learn: ordering costs

32. Quality costs include:

a. purchasing costs
b. ordering costs
c. stockout costs
d. prevention costs

Answer: d Difficulty: 2 Objective: 1

Terms to Learn: quality costs

33. Obsolescence is an example of which cost category?

a. carrying costs
b. labor costs
c. ordering costs
d. quality costs

Answer: a Difficulty: 2 Objective: 2

Terms to Learn: carrying costs

34. The costs associated with storage are an example of which cost category?
a. quality costs
b. labor costs
c. ordering costs
d. carrying costs

Answer: d Difficulty: 2 Objective: 2

Terms to Learn: carrying costs

35. Which of the following is an assumption of the economic-order-quantity decision

model?
a. The quantity ordered can vary at each reorder point.
b. Demand ordering costs and carrying costs fluctuate.
c. There will be timely labor costs.
d. No stockouts occur.

Answer: d Difficulty: 2 Objective: 2

Terms to Learn: economic order quantity (EOQ)

36. The economic order quantity ignores:

a. purchasing costs
b. relevant ordering costs
 c. stockout costs
d. Both a and c are correct.

Answer: d Difficulty: 3 Objective: 2

Terms to Learn: economic order quantity (EOQ)

37. The purchase-order lead time is the:

a. difference between the times an order is placed and delivered
b. difference between the products ordered and the products received
c. discrepancies in purchase orders
d. time required to correct errors in the products received

Answer: a Difficulty: 2 Objective: 2

Terms to Learn: purchase-order lead time

38. Which of the following statements about the economic-order-quantity decision model is
FALSE?
a. It assumes purchasing costs are relevant when the cost per unit changes due to the
quantity ordered.
b. It assumes quality costs are irrelevant if quality is unaffected by the number of
units purchased.
c. It assumes stockout costs are irrelevant if no stockouts occur.
d. It assumes ordering costs and carrying costs are relevant.

Answer: a Difficulty: 3 Objective: 2

Terms to Learn: economic order quantity (EOQ)

39. Relevant total costs in the economic-order-quantity decision model equal relevant
ordering costs plus relevant:
a. carrying costs
b. stockout costs
c. quality costs
d. purchasing costs

Answer: a Difficulty: 2 Objective: 2

Terms to Learn: economic order quantity (EOQ), ordering costs, carrying costs
40. Phonic Goods is a distributor of videotapes. Tape-Disk Mart is a local retail outlet
which sells blank and recorded videos. Tape-Disk Mart purchases tapes from Phonic
Goods at $3.00 per tape; tapes are shipped in packages of 20. Phonic Goods pays all
incoming freight, and Tape-Disk Mart does not inspect the tapes due to Phonic Goods'
reputation for high quality. Annual demand is 104,000 tapes at a rate of 4,000 tapes per
week. Tape-Disk Mart earns 20% on its cash investments. The purchase-order lead time
is two weeks. The following cost data are available:

Relevant ordering costs per purchase order $90.50

Carrying costs per package per year:
Relevant insurance, materials handling,
breakage, etc., per year $ 4.50

What is the required annual return on investment per package?

a. $60.00
b. $2.50
c. $12.00
d. $0.60

Answer: c Difficulty: 3 Objective: 3

Terms to Learn: ordering costs, carrying costs
20 tapes x $3.00 = $60.00
$60.00 x 0.2 = $12.00

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 41 THROUGH 43:

Stereo Goods is a distributor of videotapes. Video Mart is a local retail outlet which sells
blank and recorded videos. Video Mart purchases tapes from Stereo Goods at $5.00 per tape;
tapes are shipped in packages of 25. Stereo Goods pays all incoming freight, and Video Mart
does not inspect the tapes due to Stereo Goods' reputation for high quality. Annual demand is
104,000 tapes at a rate of 2,000 tapes per week. Video Mart earns 15% on its cash
investments. The purchase-order lead time is one week. The following cost data are available:

Relevant ordering costs per purchase order $94.50

Carrying costs per package per year:
Relevant insurance, materials handling,
breakage, etc., per year $ 3.50

41. What is the economic order quantity?

a. 874 packages
b. 652 packages
c. 200 packages
d. 188 packages

Answer: d Difficulty: 2 Objective: 3

Terms to Learn: economic order quantity (EOQ)
EOQ = The square root of [(2 x (104,000/25) x $94.50) / ($18.75 + $3.50)]
EOQ = 188 packages

42. What are the relevant total costs?

a. $6,150.50
 b. $4,182.56
c. $2,560.20
d. $1,951.70

Answer: b Difficulty: 3 Objective: 3

Terms to Learn: economic order quantity (EOQ), ordering costs, carrying costs
RTC = [(104,000 / 25) x $94.50] + [188 x ($18.75 + $3.50)] = $4,182.56
188 2
(see computation for question 41)

43. 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

Answer: a Difficulty: 3 Objective: 3

Terms to Learn: economic order quantity (EOQ)
[(104,000 / 25) / 188] = 22.1 deliveries
(see computation for question 41)

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 44 THROUGH 47:

The Wood Furniture company produces a specialty wood furniture product, and has the
following information available concerning its inventory items:
Relevant ordering costs per purchase order $150
Relevant carrying costs per year:
Required annual return on investment 10%
Required other costs per year $1.40
Annual demand is 10,000 packages per year. The purchase price per package is $16.

44. What is the economic order quantity?

a. 150,000 units
b. 1,000 units
c. 75,000 units
d. 5,000 units

Answer: b Difficulty: 3 Objective: 2

Terms to Learn: economic order quantity (EOQ)
Unit carrying costs = ($16 x 0.10) + $1.40 = $3
EOQ = The square root of [(2 x 10,000 x $150) / $3] = 1,000 units

45. What are the relevant total costs at the economic order quantity?
a. $1,000
b. $1,500
c. $3,000
d. $3,500

Answer: c Difficulty: 3 Objective: 2

Terms to Learn: economic order quantity (EOQ), ordering costs, carrying costs
 RTC = [(10,000 x $150) + (1,000 x $3)] = $3,000
1,000 2
(see computation for question 44)

46. What are the total relevant costs, assuming the quantity ordered equals 500 units?
a. $3,500
b. $500
c. $4,000
d. $3,750

Answer: d Difficulty: 3 Objective: 2

Terms to Learn: economic order quantity (EOQ), ordering costs, carrying costs
RTC = [(10,000 x $150) + (500 x $3)] =$3,750
500 2
47. 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
Answer: d Difficulty: 3 Objective: 2
Terms to Learn: economic order quantity (EOQ)
10,000 / 1,000= 10 deliveries

48. The annual relevant total costs are at a minimum when relevant:
a. ordering costs are greater than the relevant carrying costs
b. carrying costs are greater than the relevant ordering costs
c. carrying costs are equal to relevant ordering costs
d. None of these answers is correct.

Answer: c Difficulty: 3 Objective: 2

Terms to Learn: economic order quantity (EOQ), ordering costs, carrying costs

49. The reorder point is simplest to compute when:

a. both demand and purchase-order lead times are known with certainty
b. the number of units sold varies
c. the safety stock amount never varies
d. the relevant ordering costs and the relevant carrying costs are equal

Answer: a Difficulty: 2 Objective: 3

Terms to Learn: economic order quantity (EOQ), reorder point

50. Diskette Company sells 200 discs per week. Purchase-order lead time is 1-1/2 weeks
and the economic-order quantity is 450 units. What is the reorder point?
a. 200 units
b. 300 units
c. 750 units
d. 1,125 units

Answer: b Difficulty: 2 Objective: 4

 Terms to Learn: economic order quantity (EOQ), reorder point
200 x 1.5= 300 units

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 51 AND 52:

Owen-King Company sells optical equipment. Lens Company manufactures special glass
lenses. Owen-King Company orders 5,200 lenses 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
lenses per week. The following data are available:

Relevant ordering costs per purchase order $21.25

Relevant insurance, materials handling, breakage,
and so on, per year $ 2.50

51. What is the economic order quantity for Owen-King Company?

a. 325 lenses
b. 297 lenses
c. 210 lenses
d. 161 lenses

Answer: d Difficulty: 2 Objective: 4

Terms to Learn: economic order quantity (EOQ)
EOQ = The square root of [(2 x 5,200 x $21.25) / (($20 x 30%) + $2.50)]
EOQ = 161 lenses

52. What is the reorder point?

a. 220.5 lenses
b. 312.5 lenses
c. 397.5 lenses
d. 415.5 lenses

Answer: b Difficulty: 2 Objective: 4

Terms to Learn: reorder point
125 lenses x 2.5 weeks = 312.5 lenses

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 53 THROUGH 55:

The following information applies to Labs Plus, which supplies microscopes to laboratories
throughout the country. Labs Plus purchases the microscopes from a manufacturer which has
a reputation for very high quality in its manufacturing operation.

Annual demand (weekly demand= 1/52 of annual demand) 15,600 units

Orders per year 20
Lead time in days 15 days
Cost of placing an order $100

53. What are the annual relevant carrying costs, assuming each order was made at the
economic-order-quantity amount?
a. $200
b. $1,000
c. $2,000
 d. $6,000

Answer: c Difficulty: 2 Objective: 2

Terms to Learn: economic order quantity (EOQ), carrying costs
Annual carrying costs = annual ordering costs = $100 x 20 = $2,000

54. What is the economic order quantity assuming each order was made at the economic-
order-quantity amount?
a. 15 units
b. 20 units
c. 780 units
d. 1,040 units

Answer: c Difficulty: 2 Objective: 2

Terms to Learn: economic order quantity (EOQ)
15,600/20 = 780

55. What is the reorder point?

a. 780 units
b. 643 units
c. 1,560 units
d. 1,680 units

Answer: b Difficulty: 2 Objective: 1

Terms to Learn: reorder point
15,600/52 = 300/7 = 42.86 daily demand x 15 = 643
56. 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

Answer: d Difficulty: 2 Objective: 3

Terms to Learn: safety stock

57. 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

Answer: c Difficulty: 3 Objective: 2

Terms to Learn: safety stock, purchase-order lead time
160/20 = 8 days
58. The optimal safety stock level is the quantity of safety stock that minimizes the sum of
the annual relevant:
a. stockout costs and carrying costs
b. ordering costs and carrying costs
c. ordering costs and stockout costs
d. ordering costs and purchasing costs

Answer: a Difficulty: 2 Objective: 2

Terms to Learn: economic order quantity (EOQ), safety stock, stockout costs, carrying
costs

59. The annual relevant carrying costs of inventory consists of the sum of the:
a. ordering costs and carrying costs
b. stockout costs and carrying costs
c. incremental costs plus the opportunity costs of capital
d. incremental costs plus the carrying costs

Answer: c Difficulty: 2 Objective: 3

Terms to Learn: carrying costs

60. Party Animals sells stuffed tigers. Products, Inc., manufactures many different 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):

Estimated ordering costs per purchase order $10

Estimated insurance, materials handling, breakage,
and so on, per year $3
Actual ordering costs per order $15

What is the economic order quantity using the estimated amounts?

a. 119 stuffed tigers
b. 223 stuffed tigers
c. 273 stuffed tigers
d. 325 stuffed tigers

Answer: b Difficulty: 3 Objective: 3

Terms to Learn: economic order quantity (EOQ)
EOQ = The square root of [(2 x 10,400 x $10) / ($3 + (0.12 x $10))]
EOQ = 223 units