Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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) A) and C)
G) B) 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? Ortering cost   \quad     \quad    =$10\quad = \$ 10=$10  per orter
Carring cost   \quad     \quad     \quad  \quad =20%= 20 \%=20%  of purchase price
purchase price   \quad     \quad  \quad    =$10= \$ 10=$10  per unit
Tatal sales for year   \quad     \quad    =1,000= 1,000=1,000  urits
Sefety stack   \quad     \quad  \quad    =0\quad = 0=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) B) and E)
G) A) and E)

Question 4

Halliday Inc.receives a $2 million payment once a year.Of this amount,$700,000 is needed for cash payments made during the next year.Each time Halliday deposits money in its account,a charge of $2.00 is assessed to cover clerical costs.If Halliday can hold marketable securities that yield 5 percent,and then convert these securities to cash at a cost of only the $2 deposit charge,what is the total cost for one year of holding the minimum cost cash balance according to the Baumol model?

Accepted Answer

A)   $7,483
B)   $187
C)   $3,741
D)   $374
E)   $748F) A) and B)
G) D) and E)

Question 5

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 6

The cash balances of most firms consist of transactions,compensating,precautionary,and speculative balances.We can produce a total desired cash balance by calculating the amount needed for each purpose and then summing them together.

Accepted Answer

A) True 
 B)False  False

Question 7

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

Accepted Answer

A)   The purchase price of inventory items decreases by 50 percent.
B)   The carrying price of an item decreases (as a percent of purchase price) .
C)   The sales forecast is revised downward by 10 percent.
D)   Interest rates fall.
E)   Fixed order costs double.F) A) and B)
G) B) and E)

Question 8

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 9

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) B) and C)
G) A) and B)

Question 10

Suppose Stanley's Office Supply purchases 50,000 boxes of pens every year.Ordering costs are $100 per order and carrying costs are $0.40 per box.Moreover,management has determined that the EOQ is 5,000 boxes.The vendor now offers a quantity discount of $0.20 per box if the company buys pens in order sizes of 10,000 boxes.Determine the before-tax benefit or loss of accepting the quantity discount.(Assume the carrying cost remains at $0.40 per box whether or not the discount is taken.)

Accepted Answer

A)   $1,000 loss
B)   $1,000 benefit
C)   $500 loss
D)   $500 benefit
E)   $0 (The change would not affect profits.) F) C) and D)
G) D) and E)

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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) C) and D)
G) A) and C) B

Question 13

Gemini Inc.'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.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) A) and B)
G) B) and D) E

Question 14

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

Accepted Answer

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

Question 15

Each year,Holly's Best Salad Dressing,Inc.(HBSD) purchases 50,000 gallons of extra virgin olive oil.Ordering costs are $100 per order,and the carrying cost,as a percentage of inventory value,is 80 percent.The purchase price to HBSD 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 HBSD orders 10,000 gallons at a time.Should HBSD take the discount?

Accepted Answer

A)   From a cost standpoint, HBSD 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) C) and E)
G) A) and B)

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

Gemini Inc.'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.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 C)
G) A) and D)

Exam 28: Advanced Issues in Cash Management and Inventory Control

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

Correct Answer
verified

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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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

The cash balances of most firms consist of transactions,compensating,precautionary,and speculative balances.We can produce a total desired cash balance by calculating the amount needed for each purpose and then summing them together.

Correct Answer
verified
False

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

Correct Answer
verified

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

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

Correct Answer
verified

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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B

Correct Answer
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E

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

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

Correct Answer
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Gemini Inc.'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.On what opportunity cost of holding cash was this analysis based?

Correct Answer
verified

Exam 28: Advanced Issues in Cash Management and Inventory Control

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

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

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

The cash balances of most firms consist of transactions,compensating,precautionary,and speculative balances.We can produce a total desired cash balance by calculating the amount needed for each purpose and then summing them together.

Correct AnswerverifiedFalse

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

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

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

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedB

Correct AnswerverifiedE

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Gemini Inc.'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.On what opportunity cost of holding cash was this analysis based?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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False

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B

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E

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