Unity University, Adama Special Campus

Department of Accounting and Finance

Working Capital management and financial analysis
Test Two (Max. Weight 15 %)
Ins.Bereket K. Time Allowed0 :40hrs

Name_________________________ID.No._______________ Sec. _____________

PART I: Multiple choice question: Read the questions and choose the right
answer from the given choices

1. lead time is :-
a. Time lag between placing an order and receiving it
b. Total time during which the economic order quantity is consumed
c. The time during which the company uses the safety stock
d. Time between orders
e. None of the above
2. Which of the following is not a component of ordering cost?
A) The cost of typing and dispatching an order.
B) Follow- up costs
C) cost involved in inspection, checking, and handling to stores,
D) Transportation cost under FOB destination agreement.
E) None of the above
3. At economic order quantity,
A. annual carrying cost will be greater than annual ordering cost
B. Annual carrying cost will be less than the annual ordering cost
C.Annual carrying cost will be equal to the annual ordering cost
D. The information is not sufficient to say some thing about inventory costs
E. None of the above
PART II WORK OUT QUESTIONS (Show all your steps clearly)
1: A firm has $ 4 per year carrying cost on each unit of inventory and annual usage of 50,000 units.
Ordering cost is $ 100 per order. Calculate economic ordering quantity, total cost of inventory, annual
ordering cost and annual carrying cost?
2: A firm has an investment in the credit sales as $ 100,000 and the average collection period allowed to
the customers as 15 days. Find the amount of investment gained and lost when the return on investment
in the business is at 7 percent and borrowings demand an interest at the rate of 4 percent per annum.
The firm has a proposal to reduce its sales by reducing the credit days from 30 days to 15 days. Does the
proposal worth accepting when decrease in sales is expected as 5 percent? Ignore all other expenses as
constant.
3: A manufacturer has expected annual usage of product “X” of 50,000 units. The cost of processing an
order of purchases is $ 20, and carrying cost per unit for a year is 50 cents. Lead-time on an order is 5
days and it is a practice to keep stock usage in reserve for 2 days. Calculate (a) economic order quantity
(b) reorder point.

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