MA2-Managing Costs & Finances

Material cost

Class practice question

1 Which of the following is not a stockholding cost?

A The opportunity cost of capital tied up

B The cost of insurance
C Shipping and handling costs
D Stock obsolescence

2 The objective of holding buffer inventory is to take advantage of quantity discounts.

Is this statement TRUE or FALSE?

A True
B False

3 A company wishes to minimize its inventory costs. Order costs are $10 per order and holding cost is
$0.10 per unit. Fall Co estimates annual demand to be 5,400 units.

The economic order quantity is

_______ units.

4 The demand for a product is 12,500 units for a three month period. Each unit of product has a purchase
price of $15 and ordering costs are $20 per order placed.
The annual holding cost of one unit of product is 10% of its purchase price.

What is the Economic Order Quantity (to the nearest unit)?

A 577
B 816
C 866
D 1,155

5 A manufacturer uses 100,000 components costing $1each at a constant rate throughout the year. The cost
of making a single order for more components is $10 and the holding costs for each component are 0.5% of
the average inventory value.

What is the EOQ?

A 1,411
B 14,142
C 20,000

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6 Moura uses the economic order quantity formula (EOQ) to establish its optimal reorder quantity
for its single raw material. The following data relates to the stock costs

Purchase price: £15 per item

Carriage costs: £50 per order
Ordering costs: £5 per order

Storage costs: 10% of purchase price plus £0·20 per unit per annum
Annual demand is 4,000 units.

What is the EOQ to the nearest whole unit?

Units__________

7 A company determines its order quantity for a raw material by using the Economic Order Quantity
(EOQ) model.

What would be the effects on the EOQ and the total annual holding cost of a decrease in the cost of
ordering a batch of raw material?

EOQ Total annual holding cost

A Higher Lower
B Higher Higher
C Lower Higher
D Lower Lower

8 A company determines its order quantity for a component using the Economic Order Quantity (EOQ)
model.

What would be the effects on the EOQ and the total annual ordering cost of an increase in the annual
cost of holding one unit of the component in stock?

EOQ Total annual ordering cost

________ _________

9 A company uses 1,000 units of a component per month. The cost of placing an order is £160. EOQ is 980
units.

Calculate holding cost/unit.

10 The purchase price of a stock item is £25 per unit. In each three month period the usage of the item is
20,000 units. The annual holding costs associated with one unit equate to 6% of its purchase price. The
EOQ 730

What is the cost/order?

$_______

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11 A retailer has a steady demand for rugby balls at 50 a month. Each ball costs $6 from the supplier. The
costs involved in placing an order are $10 and the stockholding costs are 20% of the stockholding value per
annum.

How many orders will be placed per annum?

A 1.73
B 6
C 8.48
D 100

12 Point Ltd uses the economic order quantity (EOQ) model to establish the reorder quantity for raw
material Y. The company holds no buffer stock. Information relating to raw material Y is as follows:

Annual usage 48,000 units

Purchase price £80 per unit
Ordering costs £120 per order
Annual holding costs 10% of the purchase price.

Calculate:
(a) The EOQ.
(b) The total annual cost of purchasing, ordering and holding stocks of raw material Y.

13 A company uses the Economic Order Quantity (EOQ) model to establish reorder quantities. The
following information relates to the forthcoming period:

Order cost = £25 per order

Holding costs = 10% of purchase price = £4/unit
Annual demand = 20,000 units
No safety stocks are held.

Calculate frequency of order.

14 Data relating to a particular stores item are as follows:

Average daily usage 400 units

Maximum daily usage 520 units
Minimum daily usage 180 units
Lead time for replenishment of stock 10 to 15 days
Reorder quantity 8,000 units

What is the reorder level (in units) which avoids stock outs?
Units_________

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15 Data relating to one particular stores item are as follows:

Average daily issues 70 units

Maximum daily issues 90 units
Minimum daily issues 50 units
Lead time for the replenishment of stock 11 to 17 days
Reorder quantity 2,000 units
Reorder level 1,800 units

What is the maximum stock level (in units) for this stores item?

________ units

The following information relates to questions 16 and 17

A domestic appliance retailer with multiple outlets sells a popular toaster known as the Autocrisp
2000, for which the following information is available:

Average sales 75 per day

Maximum sales 95 per day
Minimum sales 50 per day
Lead time 12-18 days
Reorder quantity 1,750

16 Based on the data above, at what level of inventory would a replenishment order be issued?

_______units

17 Based on the data above, what is the maximum inventory level?

_______units

18 Data relating to a particular stores item are as follows:

Average daily usage 400 units

Maximum daily usage 520 units
Minimum daily usage 180 units
Lead time for replenishment of inventory 10 to 15 days
Average lead time 13 days
Reorder quantity 8,000 units

What is the reorder minimum inventory level?

________units

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19 A manufacturing company uses 25,000 components at an even rate during a year. Each order placed
with the supplier of the components is for 2,000 components, which is the economic order quantity. The
company holds a buffer inventory of 500 components. The annual cost of holding one component in
inventory is $2.

What is the total annual cost of holding inventory of the component?

A $2,000
B $2,500
C $3,000
D $4,000

20 Which of the following is correct with regard to inventories?

(i) Stock-outs arise when too little inventory is held

(ii) Safety inventories are the level of units maintained in case there is unexpected demand
(iii) A re-order level can be established by looking at the maximum usage and the maximum lead-time

A (i) and (ii) only

B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)

21 There are 27,500 units of Part Number X35 on order with the suppliers and 16,250 units outstanding on
existing customers' orders.

If the free inventory is 13,000 units, what is the physical inventory?

A 1,750
B 3,250
C 24,250
D 29,250

22 The following represent the materials transactions for a

company for a year:
$'000
Materials purchases 240
Issued to production 215
Materials written off 12
Returned to stores 6
Returned to suppliers 2

The material stock at 31 December 20X1 was $42,000.

What was the opening balance on the materials inventory account

at 1 January 20X1?

$_________

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23 Inventory movements for product X during the last quarter were as follows:

January Purchases 10 items at $19.80 each

February Sales 10 items at $30 each
March Purchases 20 items at $24.50
Sales 5 items at $30 each
Opening inventory at 1 January was 6 items valued at $15 each.

What would the Gross profit be for the quarter FIFO method?

24 Inventory movements for product X during the last quarter were as follows:

January Purchases 10 items at $19.80 each

February Sales 10 items at $30 each
March Purchases 20 items at $24.50
Sales 5 items at $30 each
Opening inventory at 1 January was 6 items valued at $15 each.

What would the Gross profit be for the quarter using LIFO method?

25 Inventory movements for product X during the last quarter were as follows:

January Purchases 10 items at $19.80 each

February Sales 10 items at $30 each
March Purchases 20 items at $24.50
Sales 5 items at $30 each
Opening inventory at 1 January was 6 items valued at $15 each.

What would the Gross profit be for the quarter using continuous weighted average method?

26 Inventory movements for product X during the last quarter were as follows:

January Purchases 10 items at $19.80 each

February Sales 10 items at $30 each
March Purchases 20 items at $24.50
Sales 5 items at $30 each
Opening inventory at 1 January was 6 items valued at $15 each.

What would the Gross profit be for the quarter using periodic weighted average method?

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