UNIVERSIDAD DE MANILA

COLLEGE OF BUSINESS ADMINISTRATION

Financial Management

Name: ___________________________________ Section: __________

Student Number: __________________________

TRUE OR FALSE:
1. The EOQ is the smallest lot size that a supplier will allow a customer to order.
2. As the annual demand doubles, the EOQ also doubles.
3. Carrying costs arise when an organization experiences an ability to deliver its goods to its customers.
4. One component of the ordering cost of inventory is shrinkage.
5. A stockout occurs when an item that is typically stocked is not available to satisfy a demand the moment it
occurs.
6. A quantity discount is attractive because there is a drop in the price per unit when the order is sufficiently large.
7. A formula that indicates the optimal number of units to order is referred to as economic order quantity (EOQ).
8. The cost of receiving inventory is regarded as an ordering cost.
9. A decrease in the lead time would reduce the reorder point.
10.The size of the safety stock is directly affected by economic order quantity.

MULTIPLE CHOICE:
11.The costs of preparing, issuing, and paying purchase orders, plus receiving and inspecting the items included in
orders is:
a. purchasing costs c. stockout costs
b. ordering costs d. carrying costs

12.The costs that result when a company runs out of a particular item for which there is a customer demand are:
a. shrinkage costs c. stockout costs
b. shortage costs d. EOQ estimation costs

13.The following information applies to Labs Plus, which supplies microscopes to laboratories throughout the
country. Labs Plus purchases the microscopes from a manufacturer which has a reputation for very high quality
in its manufacturing operation.

Annual demand (weekly demand=1/52 of annual demand) 20,800 units

Orders per year 20
Lead time in days 15 days
Cost of placing an order P 100

What is the reorder point?

a. 1,040 units c. 1,560 units
b. 857 units d. 2,080 units

14.Obsolescence is an example of which cost category?

a. carrying costs c. ordering costs
b. labor costs d. quality costs

15.The costs associated with storage are an example of which cost category?
a. quality costs c. ordering costs
b. labor costs d. carrying costs

16.Which of the following is an assumption of the economic-order-quantity decision model?

a. The quantity ordered can vary at each reorder point.
b. Demand ordering costs and carrying costs fluctuate.
c. There will be timely labor costs.
d. No stockouts occur.

17.The purchase-order lead time is the:

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 a. difference between the times an order is placed and delivered
b. difference between the products ordered and the products received
c. discrepancies in purchase orders
d. time required to correct errors in the products received

18.Which of the following is not an ordering cost?

a. cost of receiving inventory c. cost of the merchandise ordered
b. cost of preparing the order d. cost of storing the inventory

19.Precious Jewels Corporation produces quality jewelry items for various retailers. For the coming year, it has
estimated it will consume 500 ounces of gold. Its carrying costs for a year are P 2 per ounce. No safety stock is
maintained. If the EOQ is 100 ounces, what is the cost per order?
a. P 40 c. P 5
b. P 20 d. P 25

20.Precious Jewels Corporation produces quality jewelry items for various retailers. For the coming year, it has
estimated it will consume 500 ounces of gold. Its carrying costs for a year are P 2 per ounce. No safety stock is
maintained. If the EOQ is 100 ounces, what would be the estimate for Precious Jewels’ total carrying costs for
the coming year?
a. P 200 c. P 100
b. P 250 d. P 1,000

21.A firm estimates that its annual carrying cost for material X is P 0.30 per lb. If the firm requires 50,000 lbs. per
year, and ordering costs are P 100 per order, what is the EOQ (rounded to the nearest pound)?
a. 5,774 lbs. c. 1,732 lbs.
b. 4,082 lbs. d. 1,225 lbs.

22.If no safety stock is carried, the average inventory is equal to the

a. reorder point/2 c. economic order quantity/2
b. reorder point x 2 d. economic order quantity x 2

23.The role of safety stock in an organization is to

a. reduce the lead time for an order to be received.
b. reduce the probability of a stockout.
c. reduce the order point.
d. decrease the economic order quantity.

24.The optimal size of the safety stock is defined by the point where the
a. costs of carrying the safety stock equal stockout costs.
b. setup costs equal stockout costs.
c. ordering costs equal stockout costs.
d. reorder point equals safety stock.

25.Douglas Corporation operates its factory 300 days per year. Its annual consumption of Material Y is 1,200,000
gallons. It carries a 10,000 gallon safety stock of Material Y and its lead time is 12 business days. What is the
reorder point for Material Y?
a. 10,000 gallons c. 48,000 gallons
b. 38,000 gallons d. 58,000 gallons

26.Refer to Douglas Corporation. If the EOQ for Material Y is 30,000 gallons, and the carrying cost per gallon per
year is P 0.25, what is the total annual carrying cost for Material Y?
a. P 3,750 c. P 6,250
b. P 7,500 d. P 10,000

27.Rawson Corporation’s order quantity for Material T is 5,000 lbs. If the company maintains a safety stock of T at
500 lbs., and its order point is 1,500 lbs. What is the lead time assuming daily usage is 50 lbs.?
a. 30 days c. 10 days
b. 100 days d. 20 days

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28.Refer to Rawson Corporation. What would be the total annual carrying costs assuming the carrying cost per unit
is P 0.20?
a. P1,000 c. P 100
b. P 600 d. P1,100

29.Atkins Corporation consumes 1,200,000 gallons of Material Y per year. Its order quantity is 30,000 gallons. It
maintains a safety stock of 10,000 gallons and its annual carrying costs are P 0.25 per gallon per year. If the
ordering cost is P 20 per order, what are the total annual ordering costs?
a. P600 c. P8,300
b. P800 d. P1,200

30.A decrease in the lead time would reduce the

a. order point. c. economic order quantity.
b. safety stock. d. ordering costs.

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