Question 1

Exhibit Cartwright Computing 
Cartwright Computing expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying costs is equal to 20 percent of the purchase price. (Assume a 360-day year.) 
-Refer to Exhibit Cartwright Computing. If Cartwright holds a safety stock equal to a 30-day supply of chips, what is its average inventory level?

Accepted Answer

A)   12,088
B)   3,175
C)   15,750
D)   13,675
E)   8,124F) None of the above
G) A) and C)

Question 2

Exhibit Cartwright Computing 
Cartwright Computing expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying costs is equal to 20 percent of the purchase price. (Assume a 360-day year.) 
-Refer to Exhibit Cartwright Computing. If the lead time for placing an order is 5 days, and Cartwright holds a safety stock equal to a 30-day supply of chips, then at what inventory level should an order be placed?

Accepted Answer

A)   15,570
B)   3,175
C)   12,250
D)   13,675
E)   8,124F) B) and C)
G) B) and D)

Question 3

Exhibit Cartwright Computing 
Cartwright Computing expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying costs is equal to 20 percent of the purchase price. (Assume a 360-day year.) 
-Refer to Exhibit Cartwright Computing. How many orders should Cartwright place during the year?

Accepted Answer

A)   12
B)   25
C)   30
D)   40
E)   60F) A) and B)
G) None of the above

Question 4

Suppose Stanley's Office Supply purchases 50,000 boxes of pens every year. Ordering costs are $100 per order and carrying costs are $0.40 per box. Moreover, management has determined that the EOQ is 5,000 boxes. The vendor now offers a quantity discount of $0.20 per box if the company buys pens in order sizes of 10,000 boxes. Determine the before-tax benefit or loss of accepting the quantity discount. (Assume the carrying cost remains at $0.40 per box whether or not the discount is taken.)

Accepted Answer

A)   $1,000 loss
B)   $1,000 benefit
C)   $500 loss
D)   $500 benefit
E)   $0 (the change would not affect profits.) F) B) and C)
G) All of the above

Question 5

Gemini Inc.'s optimal cash transfer amount, using the Baumol model, is $60,000. The firm's fixed cost per cash transfer of marketable securities to cash is $180. In addition, the total estimated cash costs (transfers and carrying cost)  for the firm, based on 16 transactions per year, are $5,760. On what opportunity cost of holding cash was this analysis based?

Accepted Answer

A)   19.2%
B)   10.4%
C)   6.3%
D)   12.1%
E)   9.6%F) B) and E)
G) All of the above

Question 6

If a company increases its safety stock, then its EOQ will go up.

Accepted Answer

A) True 
 B)False

Question 7

For some firms, holding highly liquid marketable securities is a substitute for holding cash because a marketable securities portfolio can accomplish the same objective as cash.

Accepted Answer

A) True 
 B)False

Question 8

Exhibit Palmer Pens 
Assume that Palmer Executive Pens uses 1,440,000 gallons of ink each year. Further, assume that Palmer can order the ink at a cost of $2 per gallon plus fixed ordering costs of $100 per order. The firm's carrying cost is 20 percent of the inventory value, at cost.
-Refer to Exhibit Palmer Pens. What is Palmer's minimum costs of ordering and holding inventory?

Accepted Answer

A)   $6,254
B)   $10,733
C)   $11,560
D)   $13,563
E)   $19,825F) A) and E)
G) B) and D)

Question 9

Exhibit Duckett Group 
The Duckett Group is trying to determine its optimal average cash balance. The firm has determined that it will need $5,000,000 net new cash during the coming year. The fixed transaction cost of converting securities to cash is $50, and the firm earns 10 percent on its marketable securities investments.
-Refer to Exhibit Duckett Group. What will be the total cost to Duckett of maintaining the optimal average cash balance, as determined by the Baumol model?

Accepted Answer

A)   $35,356
B)   $7,071
C)   $18,493
D)   $70,711
E)   $53,190F) C) and D)
G) None of the above

Question 10

Halliday Inc. receives a $2 million payment once a year. Of this amount, $700,000 is needed for cash payments made during the next year. Each time Halliday deposits money in its account, a charge of $2.00 is assessed to cover clerical costs. If Halliday can hold marketable securities that yield 5 percent, and then convert these securities to cash at a cost of only the $2 deposit charge, what is the total cost for one year of holding the minimum cost cash balance according to the Baumol model?

Accepted Answer

A)   $7,483
B)   $187
C)   $3,741
D)   $374
E)   $748F) A) and B)
G) A) and C)

Question 11

Which of the following would cause average inventory holdings to decrease, other things held constant?

Accepted Answer

A)   the purchase price of inventory items decreases by 50 percent.
B)   the carrying price of an item decreases (as a percent of purchase price) .
C)   the sales forecast is revised downward by 10 percent.
D)   interest rates fall.
E)   fixed order costs double.F) A) and B)
G) D) and E)

Question 12

During times of inflation, which of these inventory accounting methods is best for cash flow?

Accepted Answer

A)   lifo, because the most expensive goods are recorded as being sold first, resulting in a higher cost of goods sold and a lower reported net income.
B)   specific identification, because it correctly identifies the actual item sold and so the actual cost is recorded on the income statement.
C)   weighted average, because it smoothes the reported cost of goods sold over time.
D)   it doesn't matter which you use since cash flow is unaffected by the choice of inventory identification method.
E)   fifo, because the cheapest goods are recorded as being sold first, resulting in lower cost of goods sold and higher reported net income.F) C) and D)
G) A) and C) A

Question 13

The cash balances of most firms consist of transactions, compensating, precautionary, and speculative balances. We can produce a total desired cash balance by calculating the amount needed for each purpose and then summing them together.

Accepted Answer

A) True 
 B)False

Question 14

Each year, Holly's Best Salad Dressing, Inc. (HBSD)  purchases 50,000 gallons of extra virgin olive oil. Ordering costs are $100 per order, and the carrying cost, as a percentage of inventory value, is 80 percent. The purchase price to HBSD is $0.50 per gallon. Management currently orders the EOQ each time an order is placed. No safety stock is carried. The supplier is now offering a quantity discount of $0.03 per gallon if HBSD orders 10,000 gallons at a time. Should HBSD take the discount?

Accepted Answer

A)   from a cost standpoint, hbsd is indifferent.
B)   no, the cost exceeds the benefit by $500.
C)   no, the cost exceeds the benefit by $1,000.
D)   yes, the benefit exceeds the cost by $500.
E)   yes, the benefit exceeds the cost by $1,120.F) A) and B)
G) B) and C) E

Question 15

Exhibit Duckett Group 
The Duckett Group is trying to determine its optimal average cash balance. The firm has determined that it will need $5,000,000 net new cash during the coming year. The fixed transaction cost of converting securities to cash is $50, and the firm earns 10 percent on its marketable securities investments.
-Refer to Exhibit Duckett Group. According to the Baumol model, what is the optimal transaction size for transfers from marketable securities to cash?

Accepted Answer

A)   $7,071
B)   $38,357
C)   $70,711
D)   $102,956
E)   $87,000F) A) and B)
G) B) and C)

Question 16

Exhibit Cartwright Computing 
Cartwright Computing expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying costs is equal to 20 percent of the purchase price. (Assume a 360-day year.) 
-Refer to Exhibit Cartwright Computing. Assume that Cartwright holds a safety stock equal to a 30-day supply of chips. What is the maximum amount of inventory that will have on hand at any time, that is, what will be the inventory level right after a delivery is made?

Accepted Answer

A)   9,216
B)   3,175
C)   6,243
D)   13,675
E)   8,124F) C) and D)
G) B) and D)

Question 17

Gemini Inc.'s optimal cash transfer amount, using the Baumol model, is $60,000. The firm's fixed cost per cash transfer of marketable securities to cash is $180, and the total cash needed for transactions annually is $960,000. On what opportunity cost of holding cash was this analysis based?

Accepted Answer

A)   19.2%
B)   10.4%
C)   6.3%
D)   12.1%
E)   9.6%F) B) and D)
G) B) and E)

Question 18

Exhibit Cartwright Computing 
Cartwright Computing expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying costs is equal to 20 percent of the purchase price. (Assume a 360-day year.) 
-Refer to Exhibit Cartwright Computing. What is the economic ordering quantity for chips?

Accepted Answer

A)   12,088
B)   3,175
C)   6,243
D)   13,675
E)   8,124F) None of the above
G) A) and E)

Question 19

Exhibit Cartwright Computing 
Cartwright Computing expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying costs is equal to 20 percent of the purchase price. (Assume a 360-day year.) 
-Refer to Exhibit Cartwright Computing. If Cartwright holds a safety stock equal to a 30-day supply of chips, what is Cartwright's minimum cost of ordering and carrying inventory?

Accepted Answer

A)   $28,500
B)   $15,950
C)   $68,440
D)   $34,220
E)   $47,693F) B) and D)
G) A) and E)

Question 20

Exhibit Palmer Pens 
Assume that Palmer Executive Pens uses 1,440,000 gallons of ink each year. Further, assume that Palmer can order the ink at a cost of $2 per gallon plus fixed ordering costs of $100 per order. The firm's carrying cost is 20 percent of the inventory value, at cost.
-Refer to Exhibit Palmer Pens. What is the firm's EOQ?

Accepted Answer

A)   26,833
B)   30,040
C)   43,987
D)   13,563
E)   21,456F) D) and E)
G) None of the above A

Exam 23: Other Topics in Working Capital Management

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If a company increases its safety stock, then its EOQ will go up.

Correct Answer
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For some firms, holding highly liquid marketable securities is a substitute for holding cash because a marketable securities portfolio can accomplish the same objective as cash.

Correct Answer
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Correct Answer
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Which of the following would cause average inventory holdings to decrease, other things held constant?

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During times of inflation, which of these inventory accounting methods is best for cash flow?

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A

The cash balances of most firms consist of transactions, compensating, precautionary, and speculative balances. We can produce a total desired cash balance by calculating the amount needed for each purpose and then summing them together.

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E

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Gemini Inc.'s optimal cash transfer amount, using the Baumol model, is $60,000. The firm's fixed cost per cash transfer of marketable securities to cash is $180, and the total cash needed for transactions annually is $960,000. On what opportunity cost of holding cash was this analysis based?

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A

Exam 23: Other Topics in Working Capital Management

Correct AnswerverifiedShow Answer

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Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If a company increases its safety stock, then its EOQ will go up.

Correct AnswerverifiedShow Answer

For some firms, holding highly liquid marketable securities is a substitute for holding cash because a marketable securities portfolio can accomplish the same objective as cash.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following would cause average inventory holdings to decrease, other things held constant?

Correct AnswerverifiedShow Answer

During times of inflation, which of these inventory accounting methods is best for cash flow?

Correct AnswerverifiedA

The cash balances of most firms consist of transactions, compensating, precautionary, and speculative balances. We can produce a total desired cash balance by calculating the amount needed for each purpose and then summing them together.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedE

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Gemini Inc.'s optimal cash transfer amount, using the Baumol model, is $60,000. The firm's fixed cost per cash transfer of marketable securities to cash is $180, and the total cash needed for transactions annually is $960,000. On what opportunity cost of holding cash was this analysis based?

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Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedA

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A

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E

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A