Question 1

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. Now, suppose the manufacturer offers a discount of 0.5 percent for orders of a least 40,000 gallons. Should Palmer increase its ordering quantity to take the discount?

Accepted Answer

A)   yes; it will save $827 if it takes the discount.
B)   no; it will lose $827 if it takes the discount.
C)   yes; it will save $14,400 if it takes the discount.
D)   yes; it will save $13,573 if it takes the discount.
E)   no; it will lose $13,573 if it takes the discount.F) D) and E)
G) None of the above

Question 2

Which of the following is true of the Baumol model?Note that the optimal cash transfer amount is C*.

Accepted Answer

A)   if the total amount of cash needed during the year increases by 20%, then c* will increase by 20%.
B)   if the average cash balance increases by 20%, then the total holding costs will increase by 20%.
C)   if the average cash balance increases by 20% the total transactions costs will increase by 20%.
D)   the optimal transfer amount is the same for all companies.
E)   if the fixed costs of selling securities or obtaining a loan (cost per transaction)  increase by 20%, then c* will increase by 20%.F) A) and C)
G) C) and D)

Question 3

New England Charm, Inc. specializes in selling scented candles. The company has established a policy of reordering inventory every 30 days. A recently employed MBA has considered New England's inventory problem from the EOQ model viewpoint. If the following constitute the relevant data, how does the current policy compare with the optimal policy?
   Ordering cost =$10 per order  Carrying cost =20% of purchase price  Purchase price =$10 per unit  Total sales for year =1,000 units  Safety stack =0\begin{array}{ll}	ext { Ordering cost } & =\$ 10 	ext { per order }\	ext { Carrying cost } & =20 \% 	ext { of purchase price }\	ext { Purchase price } & =\$ 10 	ext { per unit } \	ext { Total sales for year } & =1,000	ext { units } \	ext { Safety stack } & =0\end{array} Ordering cost  Carrying cost  Purchase price  Total sales for year  Safety stack ​=$10 per order =20% of purchase price =$10 per unit =1,000 units =0​

Accepted Answer

A)   total costs will be the same, since the current policy is optimal.
B)   total costs under the current policy will be less than total costs under the eoq by $10.
C)   total costs under the current policy exceed those under the eoq by $3.
D)   total costs under the current policy exceed those under the eoq by $10.
E)   cannot be determined due to insufficient information. F) A) and B)
G) A) and E)

Question 4

A just-in-time system is designed to stretch accounts payable as long as possible.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

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 should be Duckett's average cash balance?

Accepted Answer

A)   $35,356
B)   $3,536
C)   $22,157
D)   $70,711
E)   $42,918F) A) and B)
G) None of the above

Question 7

Humphrey's Housing has been practicing cash management for some time by using the Baumol model for determining cash balances. Some time ago, the model called for an average balance (C*/2)  of $500; at that time, the rate on marketable securities was 4 percent. A rapid increase in interest rates has driven the interest rate up to 9 percent. What is the appropriate average cash balance now?

Accepted Answer

A)   $200
B)   $333
C)   $414
D)   $500
E)   $666F) A) and B)
G) A) and D)

Question 8

The easier a firm's access to borrowed funds the higher its precautionary balances will be, in order to protect against sudden increases in interest rates.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is true of the EOQ model?Note that the optimal order quantity, Q, will be called EOQ.

Accepted Answer

A)   if the annual sales, in units, increases by 20%, then eoq will increase by 20%.
B)   if the average inventory increases by 20%, then the total carrying costs will increase by 20%.
C)   if the average inventory increases by 20% the total order costs will increase by 20%.
D)   the eoc is the same for all companies.
E)   if the fixed per order cost increases by 20%, then eoq will increase by 20%.F) B) and E)
G) A) and D)

Exam 23: Other Topics in Working Capital Management

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

Correct Answer
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Which of the following is true of the EOQ model?Note that the optimal order quantity, Q, will be called EOQ.

Correct Answer
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Correct Answer
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Correct Answer
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Which of the following is true of the Baumol model?Note that the optimal cash transfer amount is C*.

Correct Answer
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Correct Answer
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The easier a firm's access to borrowed funds the higher its precautionary balances will be, in order to protect against sudden increases in interest rates.

Correct Answer
verified

A just-in-time system is designed to stretch accounts payable as long as possible.

Correct Answer
verified

Correct Answer
verified

Exam 23: Other Topics in Working Capital Management

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

Correct AnswerverifiedShow Answer

Which of the following is true of the EOQ model?Note that the optimal order quantity, Q, will be called EOQ.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following is true of the Baumol model?Note that the optimal cash transfer amount is C*.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The easier a firm's access to borrowed funds the higher its precautionary balances will be, in order to protect against sudden increases in interest rates.

Correct AnswerverifiedShow Answer

A just-in-time system is designed to stretch accounts payable as long as possible.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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