1. A firm's inventory turnover (IT) is 5 times on a cost of goods sold (COGS) of $800,000.

If the IT is
improved to 8 times while the COGS remains the same, a substantial amount of funds is released from
or additionally invested in inventory. In fact,
A) $160,000 is released
B) $100,000 is additionally invested.
C) $60,000 is additionally invested.
D) $60,000 is released.
A: -D

2. Ninety-percent of Vogel Bird Seed's total sales of $600,000 is on credit. If its year-end receivables
turnover is 5, the average collection period (based on a 365-day year) and the year-end receivables
are, respectively:
A) 365 days and $108,000.
B) 73 days and $120,000.
C) 73 days and $108,000.
D) 81 days and $108,000.
A: -C

3. If EOQ = 360 units, order costs are $5 per order, and carrying costs are $.20 per unit, what is the
usage in units?
A) 129,600 units
B) 2,592 units
C) 25,920 units
D) 18,720 units
A: -B

4. Costs of not carrying enough inventory include:

A) lost sales.
B) customer disappointment.
C) possible worker layoffs.
D) all of these.
A: -D

5. Which of the following relationships hold true for safety stock?

A) the greater the risk of running out of stock, the smaller the safety of stock.
B) the larger the opportunity cost of the funds invested in inventory, the larger the safety stock.
C) the greater the uncertainty associated with forecasted demand, the smaller the safety stock.
D) the higher the profit margin per unit, the higher the safety stock necessary.
A: -D

6. Increasing the credit period from 30 to 60 days, in response to a similar action taken by all of our
competitors, would likely result in:
A) an increase in the average collection period.
B) a decrease in bad debt losses.
C) an increase in sales.
D) higher profits.
A: -A
7. The credit policy of Spurling Products is "1.5/10, net 35." At present 30% of the customers take the
discount, 62% pay within the net period, and the rest pay within 45 days of invoice. What would
receivables be if all customers took the cash discount?
A) Lower than the present level.
B) No change from the present level.
C) Higher than the present level.
D) Unable to determine without more information.
A: -A

8. An increase in the firm's receivable turnover ratio means that:

A) it is collecting credit sales more quickly than before.
B) cash sales have decreased.
C) it has initiated more liberal credit terms.
D) inventories have increased.
A: -A

9. Receiving a required inventory item at the exact time needed.

A) ABC
B) JIT
C) FOB
D) PERT
A: -B

10. EOQ is the order quantity that          over our planning horizon.
A) minimizes total ordering costs
B) minimizes total carrying costs
C) minimizes total inventory costs
D) the required safety stock
A: -B

11. A firm's inventory turnover (IT) is 8 times on a cost of goods sold (COGS) of $800,000. If the IT
changes to 5 times while the COGS remains the same, a substantial amount of funds is either released
from or additionally invested in inventory. In fact, __________.
A) $160,000 is released
B) $100,000 is additionally invested
C) $60,000 is additionally invested
D) $60,000 is released
A: C)

12. Sixty percent of Basket Wonders' annual sales of $900,000 is on credit. If its year-end
receivables turnover is 4.5, the average collection period and the year-end receivables are,
respectively __________. (Assume a 365-day year.)

A) 81 days and $120,000

B) 73 days and $120,000
C) 73 days and $108,000
D) 81 days and $108,000
A: A)

13. If EOQ = 40 units, order costs are $2 per order, and carrying costs are $.20 per unit, what is the
usage in units?

A) 10 units.
B) 16 units.
C) 40 units.
D) 80 units.
A: D)

14. If EOQ = 1,000 units, order costs are $200 per order, and sales total 5,000 units, what is the
carrying cost per unit?

A) $2
B) $10
C) $100
D) $1000
A: A)

15. Which of the following statements hold true for safety stock?

A) The greater the risk of running out of stock, the larger the safety stock needed.
B) The lower the opportunity cost of the funds invested in inventory, the smaller the safety stock
needed.
C) The greater the uncertainty associated with forecasted demand, the lower the level of safety stock
needed.
D) The higher the profit margin per unit, the lower the safety stock necessary.
A: A)

16. Which ratio might you be the most concerned with in analyzing a firm's financial leverage
position?
A) Return on equity.
B) Debt-to-total assets.
C) Acid-test.
D) Inventory turnover.
A: B)

17. The credit policy of Milwaukee Brewski Breweries is 1/10, net 30. At present 25% of the
customers take the discount. What would accounts receivable be if all customers took the cash
discount?
A) Account receivable would be lower than the present level.
B) No change from the present level.
C) Account receivable would be higher than the present level.
D) Unable to determine without more information.
A: C)

18. A decrease in the firm's receivable turnover ratio means that __________.
A) it is collecting credit sales more quickly than before
B) it is collecting credit sales more slowly than before
C) sales have gone down
D) inventories have gone up
A: B)

19. Which of the following best represents the total inventory costs, T, where S is total usage of the
inventory item for the period, Q is the quantity, O is cost per order, and C is carrying costs per
unit for the period?
A) T = C (Q/2) + O (S/Q)
B) T = C (S/Q) + O (Q/2)
C) T = SQRT [ 2 (O) (S) / C ]
D) T = SQRT [ 2 (C) (S) / O ]
A: A)

20. Which of the following statements is most correct about inventory management?
A) The order point can be expressed as the average lead time multiplied by average daily usage and
then, minus the necessary safety stock.
B) EOQ occurs where total carrying costs (TCC) plus total ordering costs (TOC) is minimized.
C) The JIT system where inventories are reduced to a bare minimum is at odds with the inventory EOQ
model.
D) For most firms, inventory management is simply the result of ordering what the plant manager
requests to maximize the output per shift.
A: - B)

21. __________ represents one quantitative approach that has been developed to estimate the ability
of businesses (and individuals) to service credit granted to them.
A) The ABC method
B) A JIT system
C) An MRP system
D) A credit-scoring system
A: - D)
22. What do we call it when a firm extends credit terms that encourage the buyers of certain
products to take delivery before the peak sales period and to defer payment until after the peak
sales period?
A) Trade account.
B) Cash discount.
C) Peak trade account.
D) Seasonal dating.
A: - D)

23. Eclipse Ellipticals, Inc., is considering a change in their credit terms. The firm is considering offering
a 1.5% discount. Most likely competitors will follow suit, so sales will remain at $1 million and 40%
of sales will be eligible to take advantage of the discount. The firm anticipates that receivables will be
reduced by $30,000 and the firm has an opportunity cost of 18%. Should the firm change its credit
terms?
A) Yes
B) No
C) It does not really matter as the benefits and the costs are identical.
D) It cannot be determined from the given information.
A: - B)

24. Place the methods of collecting on delinquent accounts from the most likely lowest to highest
cost.
A) Letters, phone calls, legal action, and personal visits.
B) Phone calls, letters, legal action, and personal visits.
C) Letters, phone calls, personal visits, and legal action.
D) Personal visits, phone calls, letters, and legal action.
A: - C)

25. A system used to decide whether to grant credit by assigning a numerical value that is related to
the creditworthiness of the applicant is a(n) __________.
A) credit-scoring system
B) ERP system
C) D&B rating classification system
D) JIT system
A: - A)

26. You have just taken a job in the credit department of that hot, new Internet firm, BurnRate.com.
You just finished calling a bank in which a credit applicant has an account and just asked a bank
representative to give you the average cash balance carried by this credit applicant.
A) In the U.S., you have just committed a felony, and your days at BurnRate.com are numbered.
B) What you have done is neither illegal (in the U.S.) nor immoral, and you may very well get an answer
to your question from the bank.
C) What you have done is technically not illegal (in the U.S.), but it is unethical.
D) What you have done is not illegal (in the U.S.) or immoral, but for the bank to answer you question
would definitely be an illegal act on their part.
A: -B)

27. A firm currently sells $500,000 annually with 3% bad debt losses. Two alternative policies are
available. Policy A would increase sales by $300,000, but bad debt losses on additional sales would be
8%. Policy B would increase sales by an additional $120,000 over Policy A and bad debt losses on the
additional $120,000 of sales would be 15%. The average collection period will remain at 60 days (6
turns per year) no matter the policy decision made. The profit margin will be 20% of sales and no
other expenses will increase. Assume an opportunity cost of 20%.
A) Make no policy change.
B) Change to only Policy A.
C) Change to Policy B (means also taking Policy A first).
D) All policies lead to the same total firm profit, thus all policies are equal.
A: - C)

28. Which of the following best represents the optimal economic order quantity (EOQ), where total
usage of the inventory item is 100,000 units for the planning period, the cost per order is $180,
and the carrying costs per unit for each period is $1?
A) 6,000 units.
B) 4,243 units.
C) 556 units.
D) 4 units.
A: - A)

29. Which of the following statements is correct regarding inventory if there were an inventory
outage?
A) Customers of our firm will likely be irritated (or disappointed) if their purchases are late or delayed
because an inventory shortage slows production at our firm.
B) The firm will possibly need to layoff workers temporarily if there is an inventory shortage.
C) The firm will likely lose sales today via cancelled orders or future sales because of past customer
experiences if customers do not receive their orders as expected and agreed upon.
D) All of the above answers are
A: - D)