Inventory Management: EOQ and JIT

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Questions and Answers

A company is trying to minimize total inventory costs. Which of the following statements best describes the primary goal of Economic Order Quantity (EOQ)?

To minimize the sum of ordering costs and holding costs. (correct)

To minimize the cost of goods sold.

To maximize the quantity of inventory on hand.

To ensure that there is always enough inventory to meet customer demand, regardless of cost.

A company uses the EOQ model and determines that its optimal order quantity is 500 units. However, due to a new supplier discount, the per-unit ordering cost decreases by 10%. What is the likely impact on the company's EOQ?

The EOQ will remain the same.

The EOQ will decrease.

The EOQ will increase. (correct)

The EOQ will double.

Which of the following is NOT a key assumption of the basic Economic Order Quantity (EOQ) model?

Demand is constant and known.

Purchase price per unit varies with the order quantity. (correct)

Lead time is constant and known.

Inventory is depleted at a uniform rate.

A retailer implements a just-in-time (JIT) inventory system. Which of the following is a potential disadvantage of JIT?

Increased vulnerability to supply chain disruptions. (A) Signup and view all the answers

Company XYZ has an annual demand of 10,000 units, an ordering cost of $10 per order, and a holding cost of $2.50 per unit per year. What is the Economic Order Quantity (EOQ)?

283 (A) Signup and view all the answers

A company is considering switching from a traditional inventory system to a just-in-time (JIT) system. Which of the following factors would be LEAST important to consider when making this decision?

Variability in production costs. (A) Signup and view all the answers

Which of the following inventory management techniques focuses on classifying inventory items based on their value and consumption?

ABC Analysis (B) Signup and view all the answers

A company uses a periodic review inventory system. The review cycle is one month. The lead time for orders is two weeks. If the target inventory level is 100 units and the amount of inventory on hand at the review time is 40 units, how many units should be ordered?

60 units (C) Signup and view all the answers

Which of the following is the primary goal of using wire transfers in financial management?

To expedite the movement of funds between different bank accounts. (B) Signup and view all the answers

A company implementing a concentration banking strategy would MOST likely aim to:

Consolidate funds from various bank accounts into a central account. (B) Signup and view all the answers

What is the MAIN purpose of a zero-balance account (ZBA) system?

To minimize the amount of idle cash held in subsidiary accounts. (A) Signup and view all the answers

How does a lockbox system primarily benefit a company's cash flow?

By accelerating the deposit of customer payments. (D) Signup and view all the answers

Which action does NOT typically reduce a firm's collection float?

Using drafts (B) Signup and view all the answers

A company finances its seasonal current assets with a short-term bank loan and its permanent current assets with long-term debt and equity. Which financing policy is the company following?

Maturity matching policy. (C) Signup and view all the answers

A firm aims to reduce its cash cycle. Which of the following actions would NOT contribute to this goal?

Offering customers extended payment terms. (A) Signup and view all the answers

Which of the following actions would MOST likely cause an increase in a firm's investment in net working capital?

The firm relaxes its credit policy. (C) Signup and view all the answers

To determine the proportion of accounts receivable exceeding 90 days past due, which report should a company generate?

An aging schedule. (A) Signup and view all the answers

According to the Baumol model, under what circumstances will the optimal cash replenishment level increase?

All of three answers are correct. (C) Signup and view all the answers

If a business shifts $130,000 of current assets into fixed assets, what is the impact on the firm's net working capital and risk of insolvency, respectively?

Decrease; increase (A) Signup and view all the answers

How does a reduction in the production time for a finished product affect the cash conversion cycle?

A decrease in the cash conversion cycle (D) Signup and view all the answers

Which inventory management technique categorizes inventory into groups based on the total investment in each category?

ABC analysis (A) Signup and view all the answers

What is the likely effect of a company offering more lenient credit terms to its customers?

Increased sales and a longer cash conversion cycle. (B) Signup and view all the answers

A company aims to optimize its cash balance. What action would be MOST effective for achieving this goal?

Investing excess cash in highly liquid, short-term securities. (A) Signup and view all the answers

How would a significant increase in a company's sales forecast affect its working capital management?

It would likely increase the need for short-term financing. (A) Signup and view all the answers

Fizzy Animators is considering offering a 3% cash discount for early payments. What is the primary expected benefit of this change in credit terms?

Reduced average collection period and lower investment in accounts receivable. (B) Signup and view all the answers

What is the annual revenue for Fizzy Animators, Inc. with their current sales of 400 films at a selling price of P725,000 per film?

P290,000,000 (D) Signup and view all the answers

Assuming 60% of customers take the 3% cash discount, what is the effective selling price per film for those customers who avail the discount?

P703,250 (A) Signup and view all the answers

How does the proposed change in credit terms impact Fizzy Animators' exposure to bad debt expense?

Bad debt expense is expected to become negligible. (B) Signup and view all the answers

What is the current investment in accounts receivable, considering 400 films are sold per year, the selling price is P725,000 per film, and the average collection period is 90 days?

P72,500,000 (C) Signup and view all the answers

What is the investment in accounts receivable after implementing the new credit terms, considering sales increase to 410 films per year and the average collection period decreases to 30 days?

P24,587,500 (A) Signup and view all the answers

What is the total cost savings (additional cost) on marginal investment in accounts receivable under the proposed plan?

P3,832,916.67 (A), P3,832,916.67 (B) Signup and view all the answers

If Fizzy Animators invests the freed-up working capital in short-term investments earning 8%, what is the approximate return on this investment, based on above answers?

Approximately P3,833,000 (B) Signup and view all the answers

Fizzy Animators, Inc. is considering offering a 3% cash discount for payments within 10 days. Currently, all sales are on credit with no discount. What is the primary trade-off the company must evaluate when deciding whether to implement this discount?

The cost of the discount versus the benefit of reduced bad debt expense and increased sales, alongside the earnings from freed-up working capital. (A) Signup and view all the answers

Fizzy Animators, Inc. expects a negligible bad debt expense under the proposed cash discount plan. Currently, it's 0.5% of sales. How does eliminating bad debt expense contribute to the overall evaluation of the cash discount plan?

It increases the net benefit of the plan because it represents a cost savings. (B) Signup and view all the answers

Fizzy Animators, Inc. anticipates that 60% of sales will take advantage of the 3% cash discount. What is the financial impact of the discount on those sales, considering the selling price of P725,000 per film?

A revenue reduction of P21,750 per film. (B) Signup and view all the answers

Fizzy Animators, Inc. can invest freed-up working capital funds at an 8% return. How does this potential investment return factor into the decision of offering a cash discount?

It increases the attractiveness of offering the discount, as freed-up capital can generate additional income. (C) Signup and view all the answers

Mack Industries has annual sales of P10 million, a cost of goods sold of P6.4 million, average inventories of P1 million, and average accounts receivable of P600,000. Which of these best describes what the company can do to improve its cash conversion cycle?

Reduce the average collection period and decrease the days in inventory. (A) Signup and view all the answers

Mack Industries has annual sales of P10 million, a cost of goods sold of P6.4 million, average inventories of P1 million, and average accounts receivable of P600,000. What is the effect on company performance if its average collection period increases significantly?

It increases the risk of bad debts and strains working capital. (B) Signup and view all the answers

Fizzy Animators, Inc. currently has an average collection period of 90 days. They anticipate it will decrease to 30 days if they offer a cash discount. What is the direct benefit of this reduction in the collection period?

Reduced investment in working capital. (D) Signup and view all the answers

Fizzy Animators, Inc. expects sales to increase by 10 films per year if they implement the cash discount. What is the incremental revenue generated by these additional sales, given the selling price of P725,000 per film?

P7,250,000 (C) Signup and view all the answers

Mack's sales are all on credit. Given this information, what calculation determines the firm's operating cycle in days, assuming a 360-day year?

Number of Days in Inventory Turnover + Number of Days in Accounts Receivable (D) Signup and view all the answers

Carry-all Solutions issued P1,000,000 of commercial paper for P992,500 for 45 days, with floatation costs totaling P22,000. Which calculation determines the effective annual rate of interest on the commercial paper, assuming a 360-day year?

<code>((1000000 - 992500 - 22000) / (992500 - 22000)) * (360/45)</code> (A) Signup and view all the answers

Marsman Co. has an estimated annual usage of 2,000,000 units, total ordering costs of P40,000, and a carrying cost of P4 per unit. Which calculation determines Marsman's economic order quantity (EOQ)?

Square root of <code>(2 * 2000000 * 40000) / 4</code> (D) Signup and view all the answers

Marsman Co. has an estimated annual usage of 2,000,000 units, total ordering costs of P40,000, a carrying cost of P4 per unit, and an economic order quantity (EOQ) of 15,812 units. What is the closest number of orders that will be placed during the year?

126 orders (A) Signup and view all the answers

What is NOT a typical goal of cash management?

Minimize the amount of cash on hand. (B) Signup and view all the answers

A company is considering relaxing its credit standards. What factor is LEAST likely to be considered in this decision?

The company's current stock price. (D) Signup and view all the answers

Which of the following would NOT typically be a motive for holding cash?

Maximization motive (to maximize profits) (D) Signup and view all the answers

A company uses commercial paper to finance its short-term needs. What is a potential disadvantage of using commercial paper?

It can only be issued by large, creditworthy corporations. (A) Signup and view all the answers

Flashcards

Wire Transfers

A method of electronically transferring funds from one bank account to another.

Concentration Banking

A strategy to centralize cash deposits from various locations into a main bank account.