MA - Ch. 3 & 4

A company orders a particular raw material in order quantities of 250 units. No safety inventory is held. The inventory holding cost is $3 per unit per annum and the annual demand is 2,500 units.

What is the annual inventory holding cost of the material?

• 1. £375

• 1. £750

• 1. £3,750

• 1. £7,500

Which of the following statements about the economic order quantity is true?

• 1. It minimises the total of inventory ordering and holding costs

• 1. It assumes that order costs increase if order quantities are higher

• 1. It is used for special ordering purposes

• 1. It is used to avoid stock outs

What will be the maximum level of inventory?

• 1. 40,000 units

• 1. 44,500 units

• 1. 46,750 units

• 1. 50,000 units

The demand for a product is 12,500 units for a three-month period. Each unit of product has a purchase price of $15 and ordering costs are $20 per order placed.

The annual holding cost of one unit of product is 10% of its purchase price.

What is the Economic Order Quantity (to the nearest unit)?

• 1. 577

• 1. 816

• 1. 866

• 1. 1,155

A company determines its order quantity for a raw material by using the Economic Order Quantity (EOQ) model.

What would be the effects on the EOQ and the total annual holding cost of a decrease in the cost of ordering a batch of raw material?

• EOQ - Higher

  
  Total annual holding cost- Lower

  
  

• EOQ - Higher

  Total annual holding - Higher

• EOQ - Lower

  Total annual holding - Higher

• EOQ - Lower

  Total annual holding - Lower

What reorder level (in units) will prevent stock outs?

• 1. 5,000

• 1. 6,000

• 1. 7,800

• 1. 8,000

A company uses 9,000 units of a component a year. The component has a purchase price of $40 per unit and the cost of placing an order is $160. The annual holding cost of one component is equal to 8% of its purchase price.

4. What is the economic order quantity (to the nearest unit) of the component?

• 1. 530

• 1. 671

• 1. 949

• 1. 1,342

A company determines its order quantity for a component using the Economic Order Quantity (EOQ) model.

Which of the following statements in respect of the EOQ is CORRECT?

• 1. Only inventory ordering costs are minimised

• 1. Total inventory holding costs and inventory purchase costs are minimised

• 1. Total inventory holding costs and inventory ordering costs are minimised

• 1. Only inventory purchase costs are minimised

The purchase price of an item of inventory is $25 per unit. In each three-month period the usage of the item is 20,000 units. The annual holding costs associated with one unit equate to 6% of its purchase price. The cost of placing an order for the item is $20.

6. What is the economic order quantity for the inventory item to the nearest whole unit?

• 1. 730

• 1. 894

• 1. 1,461

• 1. 1,633

Alpha Co buys material X from a supplier that is located next to its factory. When Alpha places an order for material X, the supplier sets up a special production run, and it can take several days for the order to be fulfilled. The supplier delivers material X to Alpha Co in small batches from the time the order is placed until the order is complete.

Alpha currently uses the economic order quantity model to determine the order quantity of material X, but a new management accountant has suggested that the economic batch quantity model (EBQ) would be more appropriate. This would have no effect on the total quantity of material X used during the year.

What would be the effect of adopting the EBQ model?

• Order quantity - Decrease

  
  Number of orders per year - Increase

• Order quantity - Decrease

  
  Number of orders per year - Decrease

• Order quantity - Increase

  
  Number of orders per year - Decrease

• Order quantity - Increase

  
  Number of orders per year - Increase