MULTIPLE CHOICE QUESTIONS

1. Inventory holding costs typically include:

A. clerical costs of purchase-order preparation.
B. costs of deterioration, theft, or spoilage.
C. costs associated with lost sales to customers.
D. forgone interest on money tied up in inventory.
E. items "B" And "D" above.
Answer: E LO: 1 Type: RC
2. Inventory holding costs would typically include all of the following except:
A. insurance.
B. theft.
C. transportation.
D. obsolescence.
E. warehouse rent.
Answer: C LO: 1 Type: RC
3. At the economic order quantity:
A. total annual inventory costs, holding costs, and ordering costs are all minimized.
B. total annual inventory costs and holding costs are minimized.
C. total annual inventory costs are minimized, and holding costs equal ordering costs.
D. total annual inventory costs are minimized, and holding costs exceed ordering costs.
E. total annual inventory costs are minimized, and ordering costs exceed holding costs.
Answer: C LO: 1 Type: N
4. Chan uses an economic order quantity model and has determined an optimal order size of 600
units. Annual demand is 18,000 units, ordering costs are $15 per order, and holding costs are
$1.50 per unit. Chan's annual ordering and holding costs total:
A. $900.
B. $1,350.
C. $9,900.
D. $27,450.
E. some other amount.
Answer: A LO: 1 Type: A

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Hilton, Managerial Accounting, Seventh Edition

Use the following to answer questions 5-6:

Cartwright Graphics uses a special purpose paper in 80% of its jobs. The paper is purchased in 100sheet packages at a cost of $100 per package. Management estimates that the cost of placing and
receiving a typical order is $15, and the annual cost of carrying a package in inventory is $1.50.
Cartwright uses 2,600 packages each year. Production is constant, and the lead time to receive an
order is 1 week.
5. The economic order quantity is approximately:
A. 203 packages.
B. 225 packages.
C. 228 packages.
D. 565 packages.
E. 631 packages.
Answer: C LO: 1 Type: A
6. The reorder point is:
A. 25 packages.
B. 50 packages.
C. 100 packages.
D. 203 packages.
E. 225 packages.
Answer: B LO: 1 Type: A
7. When comparing EOQ and JIT inventory systems, which of the following statements is false?
A. The EOQ approach takes the viewpoint that some inventory is necessary.
B. The EOQ system assumes a constant order quantity.
C. JIT argues that inventory investments should be minimized.
D. The EOQ system focuses on acquisition and holding costs.
E. JIT argues that safety stocks are necessary to reduce the probability of a stock shortage.
Answer: E LO: 2 Type: RC

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Hilton, Managerial Accounting, Seventh Edition

EXERCISES
Implementation of EOQ; JIT
8. Pullman carries a part that is popular in the manufacture of automatic sprayers. Demand for
this part is 4,000 units per year; order costs amount to $30 per order, and holding costs total
$1.50 per unit. Pullman currently places four orders per year with its suppliers.
Management is considering the implementation of an economic order quantity model in an
effort to better manage its inventories.
Required:
A. Compute Pullman's economic order quantity.
B. Compute total annual inventory costs if Pullman follows the EOQ policy.
C. How much will the company save by adopting the EOQ model?
D. Briefly explain the philosophical difference between the EOQ model and the just-in-time
model. Which of the two models will likely result in lower holding costs for the firm?
Why?
LO: 1, 2 Type: RC, A
Answer:
A. The EOQ can be figured by taking the square root of: (2 x annual requirement x cost per
order) annual holding cost per unit. The square root of (2 x 4,000 x $30) $1.50, or
160,000, is 400.
B. The ordering cost is based on 10 orders (4,000 units 400 units) x $30, and totals $300;
the holding cost is computed on Pullmans average inventory of 200 units (400 2) and
amounts to $300 (200 x $1.50). Thus, costs at the EOQ total $600 ($300 + $300).
C. Pullman is currently ordering four times each year, resulting in order costs of $120 ($30 x
4). Each order is for 1,000 units (4,000 4), which gives rise to an average inventory of
500 units (1,000 2) and holding costs of $750 (500 x $1.50). Total costs are $870 ($120
+ $750), and the EOQ produces a $270 savings for the firm ($870 - $600).
D. The EOQ model assumes that some inventory is necessary for business operations, and
the goal is to optimize the order quantity to produce a situation where ordering costs equal
holding costs. In contrast, under JIT, holding inventory in a warehouse is deemed to be
inefficient and wasteful. Thus, inventory should be minimized and even eliminated, if
possible.
Inventory under a JIT system is typically lower and, thus, holding costs are lower with this
approach.

Appendix III

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