Try the multiple choice questions below to test your knowledge of Chapter 10. Once you have completed the test, click on 'Submit Answers for Grading' to get your results. Show
If your lecturer has requested that you send your results to them, please complete the Routing Information found at the bottom of your graded page and click on the 'E-Mail Results' button. Please DO NOT forward your results unless your lecturer has specifically requested that you do so. This activity contains 20 questions.A firm's inventory turnover (IT) is 8 times on a cost of goods sold (COGS) of $800,000. If the IT changes to 5 times while the COGS remains the same, a substantial amount of funds is either released from or additionally invested in inventory. In fact, __________.Sixty percent of Basket Wonders' annual sales of $900,000 is on credit. If its year-end receivables turnover is 4.5, the average collection period and the year-end receivables are, respectively __________. (Assume a 365-day year.)If EOQ = 40 units, order costs are $2 per order, and carrying costs are $.20 per unit, what is the usage in units?If EOQ = 1,000 units, order costs are $200 per order, and sales total 5,000 units, what is the carrying cost per unit?Which of the following statements hold true for safety stock?Which ratio might you be the most concerned with in analyzing a firm's financial leverage position?The credit policy of Milwaukee Brewski Breweries is 1/10, net 30. At present 25% of the customers take the discount. What would accounts receivable be if all customers took the cash discount?A decrease in the firm's receivable turnover ratio means that __________.Which of the following best represents the total inventory costs, T, where S is total usage of the inventory item for the period, Q is the quantity, O is cost per order, and C is carrying costs per unit for the period?Which of the following statements is most correct about inventory management?__________ represents one quantitative approach that has been developed to estimate the ability of businesses (and individuals) to service credit granted to them.What do we call it when a firm extends credit terms that encourage the buyers of certain products to take delivery before the peak sales period and to defer payment until after the peak sales period?Eclipse Ellipticals, Inc., is considering a change in their credit terms. The firm is considering offering a 1.5% discount. Most likely competitors will follow suit, so sales will remain at $1 million and 40% of sales will be eligible to take advantage of the discount. The firm anticipates that receivables will be reduced by $30,000 and the firm has an opportunity cost of 18%. Should the firm change its credit terms?Place the methods of collecting on delinquent accounts from the most likely lowest to highest cost.Cohn's Marine Supply Company has a Dun & Bradstreet composite rating of "CC1," while Woatich.com, Inc., has a composite rating of "5A4." Which of the following statements is correct?A system used to decide whether to grant credit by assigning a numerical value that is related to the creditworthiness of the applicant is a(n) __________.You have just taken a job in the credit department of that hot, new Internet firm, BurnRate.com. You just finished calling a bank in which a credit applicant has an account and just asked a bank representative to give you the average cash balance carried by this credit applicant.A firm currently sells $500,000 annually with 3% bad debt losses. Two alternative policies are available. Policy A would increase sales by $300,000, but bad debt losses on additional sales would be 8%. Policy B would increase sales by an additional $120,000 over Policy A and bad debt losses on the additional $120,000 of sales would be 15%. The average collection period will remain at 60 days (6 turns per year) no matter the policy decision made. The profit margin will be 20% of sales and no other expenses will increase. Assume an opportunity cost of 20%.Which of the following best represents the optimal economic order quantity (EOQ), where total usage of the inventory item is 100,000 units for the planning period, the cost per order is $180, and the carrying costs per unit for each period is $1?Which of the following statements is correct regarding inventory if there were an inventory outage?Economic order quantity (EOQ) is the ideal quantity of units a company should purchase to meet demand while minimizing inventory costs such as holding costs, shortage costs, and order costs. This production-scheduling model was developed in 1913 by Ford W. Harris and has been refined over time. The economic order quantity formula assumes that demand, ordering, and holding costs all remain constant. Key Takeaways
1:31 Economic Order Quantity (EOQ)Formula for Calculating Economic Order Quantity (EOQ)The formula for EOQ is: Q=2DSHwhere:Q=EOQ unitsD=Demand in units (typically on an annual basis)S=Order cost (per purchase order)H=Holding costs (per unit, per year)\begin{aligned} &Q = \sqrt{ \frac{2DS}{H} }\\ &\textbf{where:}\\ &Q=\text{EOQ units}\\ &D=\text{Demand in units (typically on an annual basis)}\\ &S=\text{Order cost (per purchase order)}\\ &H=\text{Holding costs (per unit, per year)}\\ \end{aligned}Q=H2DSwhere:Q=EOQ unitsD=Demand in units (typically on an annual basis)S=Order cost (per purchase order)H=Holding costs (per unit, per year) What the Economic Order Quantity Can Tell YouThe goal of the EOQ formula is to identify the optimal number of product units to order. If achieved, a company can minimize its costs for buying, delivering, and storing units. The EOQ formula can be modified to determine different production levels or order intervals, and corporations with large supply chains and high variable costs use an algorithm in their computer software to determine EOQ. EOQ is an important cash flow tool. The formula can help a company control the amount of cash tied up in the inventory balance. For many companies, inventory is its largest asset other than its human resources, and these businesses must carry sufficient inventory to meet the needs of customers. If EOQ can help minimize the level of inventory, the cash savings can be used for some other business purpose or investment. The EOQ formula determines a company's inventory reorder point. When inventory falls to a certain level, the EOQ formula, if applied to business processes, triggers the need to place an order for more units. By determining a reorder point, the business avoids running out of inventory and can continue to fill customer orders. If the company runs out of inventory, there is a shortage cost, which is the revenue lost because the company has insufficient inventory to fill an order. An inventory shortage may also mean the company loses the customer or the client will order less in the future. Example of How to Use EOQEOQ takes into account the timing of reordering, the cost incurred to place an order, and the cost to store merchandise. If a company is constantly placing small orders to maintain a specific inventory level, the ordering costs are higher, and there is a need for additional storage space. Assume, for example, a retail clothing shop carries a line of men’s jeans, and the shop sells 1,000 pairs of jeans each year. It costs the company $5 per year to hold a pair of jeans in inventory, and the fixed cost to place an order is $2. The EOQ formula is the square root of (2 x 1,000 pairs x $2 order cost) / ($5 holding cost) or 28.3 with rounding. The ideal order size to minimize costs and meet customer demand is slightly more than 28 pairs of jeans. A more complex portion of the EOQ formula provides the reorder point. Limitations of EOQThe EOQ formula assumes that consumer demand is constant. The calculation also assumes that both ordering and holding costs remain constant. This fact makes it difficult or impossible for the formula to account for business events such as changing consumer demand, seasonal changes in inventory costs, lost sales revenue due to inventory shortages, or purchase discounts a company might realize for buying inventory in larger quantities. Frequently Asked QuestionsHow Is Economic Order Quantity Calculated?Economic order quantity is an inventory management technique that helps make efficient inventory management decisions. It refers to the optimal amount of inventory a company should purchase in order to meet its demand while minimizing its holding and storage costs. One of the important limitations of the economic order quantity is that it assumes the demand for the company’s products is constant over time. How Does Economic Order Quantity Work?Economic order quantity will be higher if the company’s setup costs or product demand increases. On the other hand, it will be lower if the company’s holding costs increase. Why Is Economic Order Quantity Important?Economic order quantity is important because it helps companies manage their inventory efficiently. Without inventory management techniques such as these, companies will tend to hold too much inventory during periods of low demand while also holding too little inventory during periods of high demand. Either problem creates missed opportunities. What happens to EOQ when order quantity increases?EOQ will increase as the annual demand and the cost of ordering increase and it will decrease as the cost of carrying inventory and the unit cost increase.
Which of the following statements about EOQ is true?The correct answer is b. An increase in demand will increase the EOQ.
What is the relationship between order quantity and EOQ?The economic order quantity (EOQ) is a company's optimal order quantity that meets demand while minimizing its total costs related to ordering, receiving, and holding inventory. The EOQ formula is best applied in situations where demand, ordering, and holding costs remain constant over time.
What happens when order quantity is increased?EOQ is the exact order quantity that minimizes the combination of these two costs. Larger order sizes minimize purchasing costs. So as order sizes increase, purchasing costs go down. However, larger orders increase inventory levels.
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When ordering quantity is higher than EOQ which one of the following is true?
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