Question 1

Thoroughbred Industries 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) B) and E)
G) A) and E) B

Question 2

How many orders should Aberwald place during the year?

Accepted Answer

A)   12
B)   25
C)   30
D)   40
E)   60F) A) and B)
G) A) and E)

Question 3

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

Accepted Answer

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

Question 4

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

Accepted Answer

A)   If the fixed costs of selling securities or obtaining a loan (cost per transaction)  increase by 20%, then C* will increase by 20%
B)   If the total amount of cash needed during the year increases by 20%, then C* will increase by 20%.
C)   If the average cash balance increases by 20%, then the total holding costs will increase by 20%.
D)   If the average cash balance increases by 20% the total transactions costs will increase by 20%.
E)   None of the above is true.F) B) and D)
G) A) and B)

Question 5

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

Accepted Answer

A) True 
 B)False  False

Question 6

All of the following have to do with inventory management except

Accepted Answer

A)   EOQ
B)   JIT
C)   FIFO
D)   LIFO
E)   DSOF) B) and E)
G) A) and B)

Question 7

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

Accepted Answer

A)   Fixed order costs double.
B)   The purchase price of inventory items decreases by 50 percent.
C)   The carrying price of an item decreases (as a percent of purchase price) .
D)   The sales forecast is revised downward by 10 percent.
E)   None of the above (all would cause average inventory to increase) .F) A) and B)
G) A) and C)

Question 8

Assume that Fashion Clothiers Inc. uses 1,440,000 yards of material each year. Further, assume that Fashion can order the material at a cost of $2 per yard, plus fixed ordering costs of $100 per order. The firm's carrying cost is 20 percent of the inventory value, at cost.
-Now, suppose the manufacturer offers a discount of 0.5 percent for orders of a least 40,000 yards. Should Fashion Clothiers 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) All of the above
G) C) and D)

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Fullerton Wine Company is a retailer which sells vintage wines. The company has established a policy of reordering inventory every 30 days. A recently employed MBA has considered Fullerton'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 stock = 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) C) and D)
G) B) and E)

Question 11

The Norris Company 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.
-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) C) and E)
G) A) and C)

Question 12

Assume that Fashion Clothiers Inc. uses 1,440,000 yards of material each year. Further, assume that Fashion can order the material at a cost of $2 per yard, plus fixed ordering costs of $100 per order. The firm's carrying cost is 20 percent of the inventory value, at cost.
-What is the firm's EOQ?

Accepted Answer

A)   26,833
B)   30,040
C)   43,987
D)   13,563
E)   21,456F) A) and E)
G) B) and E)

Question 13

Williams Company'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. 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) None of the above

Question 14

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 15

If Aberwald holds a safety stock equal to a 30-day supply of chips, what is Aberwald'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) A) and B)
G) B) and C)

Question 16

Which of the following has to do with inventory management?

Accepted Answer

A)   Economic Order Quintile
B)   In the Nick of Time
C)   Few In, Lots Out
D)   Red-line
E)   None of the aboveF) All of the above
G) B) and C)

Question 17

Crystal Clear Company purchases 50,000 gallons of distilled water each year. Ordering costs are $100 per order, and the carrying cost, as a percentage of inventory value, is 80 percent. The purchase price to CCC 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 CCC orders 10,000 gallons at a time. Should CCC take the discount?

Accepted Answer

A)   From a cost standpoint, CCC 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 C)
G) A) and B)

Question 18

Aberwald Corporation 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.) 
-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) B) and E)
G) A) and B)

Question 19

The Norris Company 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.
-According to the Baumol model, what should be Norris' average cash balance?

Accepted Answer

A)   $35,356
B)   $ 3,536
C)   $22,157
D)   $70,711
E)   $42,918F) A) and B)
G) B) and D) A

Question 20

Aberwald Corporation 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.) 
-Assume that Aberwald holds a safety stock equal to a 30-day supply of chips. What is the maximum amount of inventory that Aberwald 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) None of the above
G) C) and D)

Exam 23: Other Topics in Working Capital Management

Correct Answer
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B

How many orders should Aberwald place during the year?

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

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

Correct Answer
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False

All of the following have to do with inventory management except

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

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

Correct Answer
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Correct Answer
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Correct Answer
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Assume that Fashion Clothiers Inc. uses 1,440,000 yards of material each year. Further, assume that Fashion can order the material at a cost of $2 per yard, plus fixed ordering costs of $100 per order. The firm's carrying cost is 20 percent of the inventory value, at cost. -What is the firm's EOQ?

Correct Answer
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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
verified

If Aberwald holds a safety stock equal to a 30-day supply of chips, what is Aberwald's minimum cost of ordering and carrying inventory?

Correct Answer
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Which of the following has to do with inventory management?

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A

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Exam 23: Other Topics in Working Capital Management

Correct AnswerverifiedB

How many orders should Aberwald place during the year?

Correct AnswerverifiedShow Answer

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

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

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

Correct AnswerverifiedFalse

All of the following have to do with inventory management except

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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 AnswerverifiedShow Answer

Assume that Fashion Clothiers Inc. uses 1,440,000 yards of material each year. Further, assume that Fashion can order the material at a cost of $2 per yard, plus fixed ordering costs of $100 per order. The firm's carrying cost is 20 percent of the inventory value, at cost. -What is the firm's EOQ?

Correct AnswerverifiedShow Answer

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

If Aberwald holds a safety stock equal to a 30-day supply of chips, what is Aberwald's minimum cost of ordering and carrying inventory?

Correct AnswerverifiedShow Answer

Which of the following has to do with inventory management?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedA

Correct AnswerverifiedShow Answer

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B

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False

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A

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