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1. The books of Matulungin Manufacturing Co.

showed the following data for the


month of October 2014:
Opening and closing inventories:
Oct. 1
Raw Materials .
P17,200
Work-in Process .
24,000
Finished Goods
36,000

Oct. 31
P16,000
16,000
28,000

Direct labor cost, P32,000


Factory overhead, 75% of direct labor cost.
Cost of Goods Sold, P112,500
What is the cost of materials purchased during the month?
a.
b.
c.
d.

P87,200
P73,200
P72,000
P71,200

2. Border Company has the following data on April 30, 2014:


April manufacturing overhead ..
P30,101.80
Decrease in ending inventories:
Materials ..
2,430.00
Goods in Process .
590.00
Increase in ending inventory:
Finished Goods
1,320.40
The manufacturing overhead amounts to 50% of direct labor, and the direct labor
and manufacturing combined equal 50% of the total cost of manufacturing. All
materials are purchased F.O.B. shipping point.
What is the cost of goods manufactured?
a.
b.
c.
d.

P180,610.80
P181,200.80
P182,300.80
P183,200.80

3. Trackside Co. employs a job order cost system. Its manufacturing activities in July
2014, its first month of operation, are summarized as follows:
JOB NUMBERS
201
202
Direct materials ..
P7,000
P11,600
P5,000
Direct labor cost .
P6,600
8,400 P2,400
Direct labor hours . 1,100
1,400
400
Units produced
200
1,000
300

203
P5,800
P6,000

204
P

1,000
100

Manufacturing overhead is applied at a rate of P2 per direct labor hour for variable
overhead, P3 per hour for fixed overhead.
Jobs 201, 202, and 203 were completed in July.
What is the cost of the completed jobs?
a.
b.
c.
d.

P62,900
P62,500
P72,900
P65,900

4. The Helper Corporation manufactures one product and accounts for cost by a joborder cost system. You have obtained the following information for the year ended
December 31, 2014 from the corporations books and records:
Total manufacturing cost added during 1997
based on actual direct materials, actual
direct labor and applied factory overhead
on actual direct labor cost
.
Cost of goods manufactured based on actual
direct materials and direct labor and
applied factory overhead

P1,000,000

970,000

Applied factory overhead to work in process


based on direct labor cost

Applied factory overhead for the year, based


on total manufacturing cost

75%

27%

Beginning work in process inventory was 80% of ending work in process inventory.
What is the cost of direct materials used for year ended December 31, 2014?
a.
b.
c.
d.

P370,000
P970,000
P990,000
P970,500

5. The company uses a job order cost system. The following data were obtained
from the companys cost records as of June 30. No jobs were in process at the
beginning of June, all costs listed being incurred during the month.
Job Order No.
Labor Cost
1001
1002
1003
1004
1005
1006

Direct Materials
P 4,320
9,150
11,275
3,225
6,500
2,750

Direct Labor Hours


1,300
3,700
8,200
1,500
3,200
980

Direct
P 1,600
7,250
14,325
2,800
6,100

1,650

Manufacturing overhead costs are charged to jobs on the basis of P1.50 per direct
labor hour. The actual manufacturing overhead cost for month totaled P30,350.
During June, Job Order Nos. 1001, 1002, 1004 and 1005 were completed. Jobs 1001
and 1002 were shipped out and the costumers were billed P9,000 for Job 1001 and
P20,000 for Job 1002.
The cost of goods manufactured would be:
a.
b.
c.
d.

P55,500
P55,495
P56,495
P57,500

6. The Glen Manufacturing Company manufactures a product exclusively to


customer order, employing a job order cost system.
On August 1, 2014, its work in process inventory (5 partially completed jobs) had a
cost of P3,000.
During August, no additional orders were put into production and 18 orders were
completed (total cost, P24,000) of which 14 (cost P20,000) were shipped.
Material requisition in August totaled P17,000 and direct labor cost were P8,000. At
the beginning of the year, 2014, a predetermined overhead rate of 150% of
expected direct labor cost was established.

The August 31, 2014 work in process inventory is:


a.
b.
c.
d.

P 4,000
P14,000
P16,000
P20,000

7. Job No. 210 has, at the end of the second week in February, an accumulated total
cost of P4,200. In the third week, P1,000 of direct materials were used on Job,
together with P10 of indirect materials.
Twenty (20) hours of direct labor services were applied to the job at a cost of P5 per
hour.
Manufacturing overhead was applied at the basis of P2.50 per direct labor hour for
fixed overhead and P2 per hour for variable overhead.
Job No. 210 was the only job completed during the third week.
The total cost of Job Order No. 210 is:
a.
b.
c.
d.

P5,390
P5,360
P5,350
P5,400

8. Tillman Company uses a job-order cost system and has two production
departments, M and A, Budgeted manufacturing costs for 1997 are as follows:
Department
M
Direct materials ..
P100,000
Direct labor
800,000
Manufacturing Overhead
400,000

Department
A
P700,000
200,000
600, 000

The actual material and labor costs charged to Job No. 432 during 1980 were as
follows:
Direct material .
P25,000
Direct labor:
Department M ..
Department A
20,000

8,000
12,000

Tillman applies manufacturing overhead to production orders on the basis of directlabor cost using departmental rates predetermined at the beginning of the year
based on the annual budget. The total manufacturing cost associated with Job No.
432 for 1980 should be:
March
1, balance ..
P 12,000
31, direct materials
40,000
31, direct labor ....
30,000
31, direct overhead ...
27,000
31, to finished goods .
( 100,000 )
Worrel applies overhead to production at a predetermined rate at 90% based on the
direct labor cost. Job No. 232, the only job still in process at the end of March 1997,
has been charged with factory overhead of P2,250. What was the amount of direct
materials charged to Job no. 232?
a.
b.
c.
d.

P2,250
P2,500
P4,250
P9,000

9. The work-in-Process account of the Malinta Company which uses a job order cost
system follows:
Work-In-Process
____________________________________________________________________________________
April 1 Balance
P25,000
Finished Goals .
P125,450
Direct Materials
50,000
Direct Labor .
40,000
Fac. Overhead Applied
30,000
Overhead is applied to production at a predetermined rate, based on direct labor
cost. The work in process at April 30 represents the cost of Job No. 456, which has
been charged with applied overhead of P2,400.
The cost of direct materials charged to Job No. 456 and Job No. 789 amounted to:
a.
b.
c.
d.

P.8,700
P7,600
P4,500
P4,200

10. The following data were taken from the records of Charming Company:
08/31/14
Inventories:
Raw materials ..
?
P50,000
Work in process ..
80,000
95,000
Finished goods .
60,000
78,000

09/30/14
P

Raw materials purchases, P46,000.


Factory overhead, 75% of direct labor cost, P63,000.
Selling and administrative expenses, 12.5% of sales, P25,000
Net income for September 1997, P25,000.
What is the cost of raw materials inventory on August 31, 2014?
a. P30,000
b. P40,000
c. P46,000
d. P50,000
11. Mayon Corporation manufactures rattan furniture sets for export and uses the
job order cost system in accounting for its costs. You obtained from the
corporations books and records the following information for the year ended
December 31, 1997:
-

The work in process inventory on January 1 was 20% less than the work in
process inventory on December 31.

The total manufacturing costs added during 1997 was P900,000 based on
actual direct materials and direct labor but with manufacturing overhead
applied on actual labor pesos.

The manufacturing overhead applied to process was 72% of the direct labor
pesos, and it was equal to 25% of the total manufacturing costs.

The costs of the goods manufactured, also based on actual direct materials
actual direct labor and applied manufacturing overhead was P850,000.

The cost of direct materials used and the work in process inventory on December
31, 1997 are:
Direct materials Used
a.
b.

P1,075,000
P 362,500

WIP inventory, 12/31/97


P200,000
P250,000

c.
d.

P 312,500
P1,100,000

P250,000
P275,000

12. The Diamond Company uses a job order cost accounting system. Overhead is
applied to production at a predetermined rate based on direct labor cost.
The following postings appear in the ledger accounts of the company for the month
of September 1997:
Debit
Work in process, Sept. 1
..
P30,000
Direct materials
..
60,000
Factory overhead
..
40,000
Direct labor
.
50,000
On September 30, 1997, finished goods completed, from work in process cost
P160,000.
Job No. 327 was the only job completed in September, and it has been charged
P4,600 for factory overhead.
Direct materials charged to Job No. 327 was:
a.
b.
c.
d.

P10,350
P14,650
P 9,650
P25,000

13. Variety Factory uses a job order cost system. Per company records, the total
charges to work-in-process in March 1997 were as follows:
Direct materials
.
P125,000
Direct labor
..
122,000
Overhead 75% of direct labor cost.
No jobs were in process at the beginning of the month. During the month, work-inprocess in the amount of P310,500 was charged to finished goods. On March 31,
1997 the only job order remaining was Job No. 100 with a direct labor cost of
P10,000

The cost of direct materials charged to Job No. 100 was:


a.
b.
c.
d.

P20,500
P14,875
P10,500
P15,000

14. Marilag Company had the following inventories:


April 1
Direct materials ...
P 36,000
P45,000
Work in process ...
18,000
26,000
Finished goods ..
54,000
72,000

April 30

The following information were available for April 1997:


Direct labor

P 60,000
Direct labor rate per hour

P7.50
Overhead rate per direct labor hour

10.00
Cost of goods manufactured
.
153,650
What is the prime cost during April 1997?
a.
b.
c.
d.

P81,650
P80,000
P90,000
P96,000

15. Worley Company has underapplied overhead of P45,000 for the year ended
December 31, 1997. Before disposition of the underapplied overhead, selected
December 31, 1997 balances from Worleys accounting records are as follows:
Sales
.
P1,200,000
Cost of goods sold ..
..
720,000
Inventories:

Direct materials
.
Work in process
.
Finished goods

36,000
54,000
90,000

Under Worleys cost accounting system, over- or underapplied overhead is allocated


to appropriate inventories and cost of goods sold based on year-end balances. In his
1997 income statement, Worley should report cost of goods sold of
a.
b.
c.
d.

P682,500
P684,000
P756,000
P757,500

16. Blackwood uses a job order cost system and applies factory overhead to
production order on the basis of direct-labor cost. The overhead rates for 1997 are
200% for Department A and 50% for Department B. Job 123, started and completed
during 1997, was charged with the following costs:
Department
A
B
Direct materials . P25,000
Direct labor ........
?
Factor overhead ...
40,000

P 5,000
30,000
?

The total manufacturing cost associated with Job 123 should be


a.
b.
c.
d.

P135,000
P180,000
P195,000
P240,000

17. Birk Co. uses a job order cost system. The following debits (credit) appeared in
Birks work-in-process account for the month of April 1997:
April

Description

Amount

1
30
30
30
30

Balance
Direct materials
Direct labor
Factory Overhead
To finished goods

P 4,000
24,000
16,000
12,800
( 48,000 )

Birk applies overhead to production at a predetermined rate of direct labor costs.


Job No. 5, the only job still in process on April 30, 1995 has been charged with direct
labor of P2,000. What was the amount of direct materials charged to Job No. 5?
a. P 3,000

b. P 5,200
c. P 8,800
d. P24,000
18. National Marketing Corp. uses a job-order cost system. It has three production
departments, X, Y and Z. The manufacturing budget cost for 1997 is as follows:
Dept. X

Dept. Y

Dept.

Z
Direct Materials
Direct Labor
400,000.00
Mfg. Overhead
200,000.00

P600,000.00
200,000.00
600,000.00

P400,000.00
500,000.00

P200,000.00

100,000.00

For Job No. 01-90 completed in 1997, direct material cost was P75,000.00; direct
labor, Dept. X, P40,000.00, Dept. Y, P100,000.00, Dept. Z, P200,000.00. The
corporation applies manufacturing overhead to each job on the basis of direct labor
cost using department rates predetermined at the beginning of the year based on
manufacturing budget cost.
The total manufacturing cost of Job No. 01-90 is:
a.
b.
c.
d.

P235,000
P310,000
P280,000
P150,000

19. RV Crafts manufactures to customer order using the job order cost system. For
the month just ended, it registered the following data:
Beginning work in process (5 partially
completed jobs)
..
P300,000
Orders completed (18)
. 2,400,000
Orders shipped (14)

2,000,000
Materials requisitioned for the month
.
1,700,000
Direct labor cost
...
800,000
Overhead rate .
150 of direct labor cost
The ending work in process inventory was:
a. P1,600,000
b. P1,400,000

c.
d.

P
P

300,000
700,000

20. The accounting records for 1997 of Wagner Music Co. showed the following:
Increase in raw materials inventory
.
P 45,000
Decrease in finished goods inventory
.
150,000
Raw material purchased
..
1,290,000
Direct labor payroll
..
600,000
Factory overhead
..
900,000
Freight-out
.
135,000
The cost of raw materials used for the period amounted to:
a.
b.
c.
d.

21.

P1,245,000
P1,290,000
P1,335,000
P1,380,000

Inventoriable costs are reported as an asset when incurred and expensed on the income
statement when the product is sold.
Answer:

22.

True

Difficulty:

Objective:

Cost of goods sold refers to the products brought to completion, whether they were started
before or during the current accounting period.
Answer: False
Difficulty: 1
Objective: 6
Cost of goods manufactured refers to the products brought to
completion, whether they were started before or during the current
accounting period.

23.

For a manufacturing company, direct labor costs may be included in


a. direct materials inventory only.
b.

merchandise inventory only.

c.

both work-in-process inventory and finished goods inventory.

d.

direct materials inventory, work-in-process inventory, and finished


goods inventory accounts.

Answer:
24.

Difficulty:

Objective:

For a manufacturing company, indirect manufacturing costs may be included in


a. direct materials inventory only.
b.

merchandise inventory only.

c.

both work-in-process inventory and finished goods inventory.

d.

direct materials inventory, work-in-process inventory, and finished


goods inventory accounts.

Answer:

Difficulty:

Objective:

25. For a manufacturing-sector company, the cost of factory insurance is


classified as a
a.

direct material cost.

b.

direct manufacturing labor cost.

c.

manufacturing overhead cost.

d.

period cost.

Answer:

Difficulty:

Objective:

26. For a printing company, the cost of paper is classified as a


a.

direct material cost.

b.

direct manufacturing labor cost.

c.

manufacturing overhead cost.

d.

period cost.

Answer:

Difficulty:

Objective:

27. Wages paid to machine operators on an assembly line are classified as a


a.

direct material cost.

b.

direct manufacturing labor cost.

c.

manufacturing overhead cost.

d.

period cost.

Answer:
28.

Difficulty:

Objective:

Manufacturing overhead costs in an automobile manufacturing plant MOST likely include


a. labor costs of the painting department.
b.

indirect material costs such as lubricants.

c.

sales commissions.

d.

steering wheel costs.

Answer:
29.

Difficulty:

Manufacturing overhead costs are also referred to as


a. indirect manufacturing costs.
b.

prime costs.

Objective:

c.

period costs.

d.

conversion costs.

Answer:

Difficulty:

Objective:

Objective:

30. Manufacturing costs include all EXCEPT


a.

costs incurred inside the factory.

b.

both direct and indirect costs.

c.

both variable and fixed costs.

d.

both inventoriable and period costs.

Answer:

Difficulty:

31. Inventoriable costs


a.

include administrative and marketing costs.

b.

are expensed in the accounting period sold.

c.

are particularly useful in management accounting.

d.

are also referred to as nonmanufacturing costs.

Answer:

Difficulty:

Objective:

32. Inventoriable costs are expensed on the income statement


a.

when direct materials for the product are purchased.

b.

after the products are manufactured.

c.

when the products are sold.

d.

not at any particular time, it varies.

Answer:

Difficulty:

Objective:

33.

Costs that are initially recorded as assets and expensed when sold are referred to as
a. period costs.
b.

inventoriable costs.

c.

variable costs.

d.

fixed costs.

Answer:

Difficulty:

Objective:

34. For merchandising companies, inventoriable costs include


a.

the cost of the goods themselves.

b.

incoming freight costs.

c.

insurance costs for the goods.

d.

all of the above.

Answer:

Difficulty:

Objective:

35. For manufacturing firms, inventoriable costs include


a.

plant supervisor salaries.

b.

research and development costs.

c.

costs of dealing with customers after the sale.

d.

distribution costs.

Answer:

Difficulty:

Objective:

36. A plant manufactures several different products. The wages of the plant
supervisor can be classified as a(n)
a.

direct cost.

b.

inventoriable cost.

c.

variable cost.

d.

period cost.

Answer:

Difficulty:

Objective:

37. The cost of inventory reported on the balance sheet may include all of
the following EXCEPT

a.

customer-service costs.

b.

wages of the plant supervisor.

c.

depreciation of the factory equipment.

d.

the cost of parts used in the manufacturing process.

Answer:

Difficulty:

Objective:

38. For a computer manufacturer, period costs include the cost of


a.

the keyboard.

b.

labor used for assembly and packaging.

c.

distribution.

d.

assembly-line equipment.

Answer:

Difficulty:

Objective:

39. Period costs


a.

include only fixed costs.

b.

seldom influence financial success or failure.

c.

include the cost of selling, delivering, and after-sales support for


customers.

d.

should be treated as an indirect cost rather than as a direct


manufacturing cost.

Answer:

Difficulty:

Objective:

40. Period costs


a.

are treated as expenses in the period they are incurred.

b.

are directly traceable to products.

c.

include direct labor.

d.

are also referred to as manufacturing overhead costs.

Answer:

Difficulty:

Objective:

Objective:

41. Which of the following is NOT a period cost?


a.

Marketing costs

b.

General and administrative costs

c.

Research and development costs

d.

Manufacturing costs

Answer:

Difficulty:

42. Costs expensed on the income statement in the accounting period


incurred are referred to as
a.

direct costs.

b.

indirect costs.

c.

period costs.

d.

inventoriable costs.

Answer:
43.

Prime costs include

Difficulty:

Objective:

a.

direct materials and direct manufacturing labor costs.

b.

direct manufacturing labor and manufacturing overhead costs.

c.

direct materials and manufacturing overhead costs.

d.

only direct materials.

Answer:
44.

Difficulty:

Objective:

Conversion costs include


a. direct materials and direct manufacturing labor costs.
b.

direct manufacturing labor and manufacturing overhead costs.

c.

direct materials and manufacturing overhead costs.

d.

only direct materials.

Answer:

Difficulty:

Objective:

45.

Total manufacturing costs equal


a. direct materials + prime costs.
b.

direct materials + conversion costs.

c.

direct manufacturing labor costs + prime costs.

d.

direct manufacturing labor costs + conversion costs.

Answer:
46.

Difficulty:

Objective:

The cost classification system used by manufacturing firms include all of the following
EXCEPT
a. direct materials costs and conversion costs.
b.

direct materials costs, direct manufacturing labor costs, and


manufacturing overhead costs.

c.

indirect materials costs, indirect manufacturing labor costs, and


manufacturing overhead costs.

d.

prime costs and manufacturing overhead costs.

Answer:

Difficulty:

Objective:

47. Manufacturing overhead costs may include all EXCEPT


a.

salaries of the plant janitorial staff.

b.

labor that can be traced to individual products.

c.

wages paid for unproductive time due to machine breakdowns.

d.

overtime premiums paid to plant workers.

Answer:
48.

Difficulty:

Objective:

Which of the following formulas determine cost of goods sold in a merchandising entity?
a. Beginning inventory + Purchases + Ending inventory = Cost of
goods sold
b.

Beginning inventory + Purchases - Ending inventory = Costs of


goods sold

c.

Beginning inventory - Purchases + Ending inventory = Cost of goods


sold

d.

Beginning inventory - Ending inventory - Purchases = Cost of goods


sold

Answer:
49.

Difficulty:

Objective:

Which of the following formulas determine cost of goods sold in a manufacturing entity?
a. Beginning work-in-process inventory + Cost of goods manufactured
- Ending work-in-process inventory = Cost of goods sold
b.

Beginning work-in-process inventory + Cost of goods manufactured


+ Ending work-in-process inventory = Cost of goods sold

c.

Cost of goods manufactured - Beginning finished goods inventory Ending finished goods inventory = Cost of goods sold.

d.

Cost of goods manufactured + Beginning finished goods inventory Ending finished goods inventory = Cost of goods sold.

Answer:
50.

Difficulty:

Objective:

Underapplied overhead is
a. reported as unearned revenue in the balance sheet.
b. added to the Manufacturing Overhead account.
c. added to Cost of Goods Sold.
d. credited to Cost of Goods Sold.

ANSWER: C
51.

Product costs may refer to


a.
inventoriable costs for external reporting.
b.
design costs plus manufacturing costs for government contracts.
c.
all costs incurred along the value chain for pricing decisions.
d.
all of the above refer to product costs, it varies.
Answer:

Difficulty:

Objective:

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 52 THROUGH 53.


The following information pertains to Alleighs Mannequins:
Manufacturing costs

P 1,500,000

Units manufactured

30,000

Units sold

29,500 units sold for P85 per unit

Beginning inventory

0 units

52. What is the average manufacturing cost per unit?


a.

P50.00

b.

P50.85

c.

P17.65

d.

P85.00

Answer: a
Difficulty:
$1,500,000 / 30,000 = $50.00

Objective:

53. What is the amount of ending finished goods inventory?


a.

P42,500

b.

P25,424

c.

P25,000

d.

P1,475,000

Answer: c
Difficulty: 2
(30,000 - 29,500) x $50.00 = $25,000

Objective:

54. Problem :
A firm has 1,000 A items (which it counts every week, i.e., 5 days), 4,000 B items (counted
every 40 days), and 8,000 C items (counted every 100 days). How many items should be
counted per day?
55. Problem :
Assume you have a product with the following parameters:
Annual Demand = 360 units

Holding cost per year = P1.00 per unit


Order cost = P100 per order
What is the EOQ for this product?
56. Problem :
Given the data from Problem 3, and assuming a 300-day work year, how many orders should be
processed per year? What is the expected time between orders?
57. Problem :
What is the total cost for the inventory policy used in Problem 3?
58. Problem :
If demand for an item is 3 units per day, and delivery lead-time is 15 days, what should we use
for a simple re-order point?
59. Problem :
Litely Corp sells 1,350 of its special decorator light switch per year and places orders for 300 of
these switches at a time. Assuming no safety stocks, Litely estimates a 50% chance of no
shortages in each cycle and the probability of shortages of 5, 10, and 15 units as 0.2, 0.15, and
0.15 respectively. The carrying cost per unit per year is calculated as P5 and the stockout cost is
estimated at P6 (P3 lost profit per switch and another P3 loss of goodwill or future sales). What
level of safety stock should Litely use for this product? (Consider safety stock of 0, 5, 10, and 15
units.)
60. Problem :
Presume that Litely carries a modern white kitchen ceiling lamp that is quite popular. The
anticipated demand during lead-time can be approximated by a normal curve having a mean of
180 units and a standard deviation of 40 units. What safety stock should Litely carry to achieve a
95% service level?

ANSWERS
Problem 1:
Item Class

Quantity

Policy

Number of Items to Count Per Day

1,000

Every 5 days

1000/5 = 200/day

4,000

Every 40 days

4000/40=100/day

8,000

Every 100 days

8000/100=80/day

Total items to count: 380/day

Problem 2:

EOQ

2* Demand *Order Cost


2*360*100

72000 268.33 items


Holding cost
1

The EOQ model assumes any real quantity is feasible. The actual quantity ordered may need to
be an integer value and may be affected by packaging or other item characteristics. In the
following Problems an EOQ of 268 is assumed.
Problem 3:

Demand 360

1.34 orders per year


Q
268

Working days
300 /1.34 224 days between orders
Expected number of orders

Problem 4:

Demand *Order Cost (Quantity of Items) *(Holding Cost)

Q
2
360*100 268*1

134 134 $268


268
2

TC

Notice that at the EOQ Total Holding Cost and Total Ordering Cost are equal.
Problem 5:
ROP = Demand during lead-time = 3 * 15 = 45 units
Problem 6:
Safety stock 0 units:
Carrying cost equals zero.
Total Stockout Costs = (stockout costs * possible units of shortage * probability of shortage *
number of orders per year)

S0 6*5*0.2*

1350
1350
1350
6*10*0.15*
6*15*0.15*
$128.25
300
300
300

Safety stock 5 units:


Carrying cos t $5 per unit * 5 units $25

S5 6*5*0.15*

Stockout cost:

1350
1350
6*10*0.15*
$60.75
300
300

Total Cost = Carrying cost + Stockout cost $25 $60.75 $85.75

Safety stock 10 units:

Carrying cos t 10 * 5 $50.00


S10 6 * 5* 015
. *

Stockout cost:

1350
$20.25
300

Total Cost = Carrying cost + Stockout cost $50.00 $20.25 $70.25

Safety stock 15:


Carrying cos t 15* 5 $75.00
Stockout cos ts 0

(There is no shortage if 15 units are maintained)

Total Cost = Carrying cost + Stockout cost $75.00 $0 $75.00

Therefore: Minimum cost comes from carrying a 10 unit safety stock.

Problem 7:
To find the safety stock for a 95% service level it is necessary to calculate the 95th percentile on
the normal curve. Using the standard Normal table from the text, we find the Z value for 0.95 is
1.65 standard units. The safety stock is then given by:
(165
. * 40) 180 66 180 246 Ceiling Lamps