Unit – 2

Value Engineering

1. Re-order level is calculated as:

a) Maximum consumption x Maximum re-order period
b) Minimum consumption x Minimum re-order period
c) 1 /2 of (Minimum + Maximum consumption)
d) Maximum level -Minimum level

2. Economic order quantity is that quantity at which cost of holding and

carrying inventory is:
a) Maximum and equal
b) Minimum and equal
c) It can be maximum or minimum depending upon case to case.
d) Minimum and unequal

3. Factors that are largely considered in making or buying decisions are called
a) Quality of suppliers
b) Dependability of suppliers
c) Production irrelevancy
d) Both a and b

4. Decisions are made by company which products to manufacture and sell and
in what quantities out of many product lines are considered as
a) Incremental decisions
b) Outsource decisions
c) Product mix decisions
d) In-source decisions

5. Buying of goods or services from suppliers or vendors of some other

country instead of local supplier is classified as
a) Out-sourcing
b) In-sourcing
c) Idle sourcing
d) Sunk sourcing

Prepared by
Prof. G. Gnanakumar, Asst. Professor / Mechanical,
Panimalar Institute of Technology, Chennai
6. .......... represents that quantity of material which is normally ordered when a
particular material reaches the ordering level.
a) EOQ
b) BOQ
c) EBQ
d) Re-order period
e) All of these

7. The quantity of material to be ordered at one time is known as

a) EOQ
b) BOQ
c) EBQ
d) Re-order period
e) All of these

8. Which of the following is not a relevant cost information in a make or buy

decision?
a) Variable cost of making
b) General fixed cost
c) Purchase price
d) Loss of contribution to make the product

9. Which of the following factors are not qualitative factors in a make or buy
decision?
a) Doubt as to the ability of the subcontractor to meet delivery dates
b) Doubt as to ability of the subcontractor to maintain quality
c) The case with which improvements can be made to the product
d) The effect of redundancy on labour relations

10. About 50 items are required every day for a machine. A fixed cost of ` 50 per
order is incurred for placing an order. The inventory carrying cost per item
amounts to Re. 0.02 per day. The lead period is 32 days. Compute reorder
level.
a) 1,200 items
b) 1,400 items
c) 1,600 items
d) 1,800 items

11. Which of the following is NOT a reason for carrying inventory?

a) To maintain independence of operations

Prepared by
Prof. G. Gnanakumar, Asst. Professor / Mechanical,
Panimalar Institute of Technology, Chennai
 b) To take advantage of economic purchase-order size
c) To make the system less productive
d) To meet variation in product

12. Inventory of Rs.96,000 was purchased during the year. The cost of goods
sold was Rs. 90,000 and the ending inventory was Rs. 18,000. What was the
inventory turnover ratio for the year?
a) 5.0 times
b) 5.3 times
c) 6.0 times
d) 6.4 times

13. Which of the following inventory valuation methods shows higher profits
during the period of rising prices?
a) FIFO method.
b) LIFO method.
c) Weighted average method.
d) Simple average method.

14. Annual requirement is 7800 units; consumption per week is 150 units. Unit
price Rs. 5, order cost Rs. 10 per order. Carrying cost Rs. 1 per unit and lead
time is 3 weeks, The Economic order quantity would be.
a) 395 units
b) 300 units
c) 250 units
d) 150 units

15. FOH absorption rate is calculated by the way of:

a) Estimated FOH Cost/Direct labour hours
b) Estimated FOH Cost/No of units produced
c) Estimated FOH Cost/Prime Cost
d) All of the given options

16. Which of the following is/are not associated with ordering costs?
a) Interest
b) Insurance
c) Opportunity costs
d) All of the given options

Prepared by
Prof. G. Gnanakumar, Asst. Professor / Mechanical,
Panimalar Institute of Technology, Chennai
17. Under Periodic Inventory System Purchase of inventory is treated as:
a) Assets
b) Expense
c) Income
d) Liability

18. When prices are rising over time, which of the following inventory costing
methods will result in the lowest gross margin/profits?
a) FIFO
b) LIFO
c) Weighted Average
d) Cannot be determined

19. The Inventory Turnover ratio is 5 times and numbers of days in a year is 365.
Inventory holding period in days would be
a) 100 days
b) 73 days
c) 50 days
d) 10 days

20. Which of the following is NOT an assumption of the basic economic-order

quantity model?
a) Annual demand is known
b) Ordering cost is known
c) Carrying cost is known
d) Quantity discounts are available

21. The Economic order quantity can be calculated by

a) Formula Method
b) Table Method
c) Graph Method
d) All of the given

22. The cost reduction technique in comparison to the worth of a product is

known as
a) Reverse engineering
b) Value engineering
c) Material engineering
d) Quality engineering

Prepared by
Prof. G. Gnanakumar, Asst. Professor / Mechanical,
Panimalar Institute of Technology, Chennai
23. Value analysis examines the
a) Design of every component
b) Method of manufacturing
c) Material used
d) All of the above

24. Value analysis is normally applied to

a) New products
b) Old products
c) Future products
d) Both (A) and (B)

25. Value can be defined as the combination of _______ which ensures the
ultimate economy and satisfaction of the customer.
a) Efficiency, quality, service and price
b) Efficiency, quality, service and size
c) Economy, quality, service and price
d) Efficiency, material, service and price

26. Value is the cost directly proportionate to

a) Price
b) Function
c) Product Material
d) All of the above

27. The cost incurred by the manufacturer beyond use value is called
a) Cost value
b) Esteem value
c) Exchange value
d) None of the above

28. Value analysis is a ____ process

a) Remedial
b) Preventive
c) Continuous
d) None of the above

29. Value analysis should be applied when the following symptom(s) is (are)
present
Prepared by
Prof. G. Gnanakumar, Asst. Professor / Mechanical,
Panimalar Institute of Technology, Chennai
 a) Rate of return on investment is reducing
b) Reduction in sales of the product
c) Firm is unable to meet delivery promises
d) All of the above

30. Who is named as Father of Value Analysis?

a) Lawrence D. Miles
b) George Terborgh
c) Michael Jucius
d) Edwin B. Flippo

31. Important reason(s) for arising unnecessary costs are

a) Poor design of product
b) Too tight specifications
c) Lack of standardization
d) All of the above

32. The costs those which neither contributes to function nor the appearance of
the product is called
a) Extra cost
b) Unnecessary cost
c) Esteem cost
d) Exchange cost

33. Mr. X takes a loan of Rs 50,000 from HDFC Bank. The rate of interest is 10%
per annum. The first installment will be paid at the end of year 5. Determine
the amount of equal annual installments if Mr. X wishes to repay the amount
in five installments.
a) Rs 19500
b) Rs 19400
c) Rs 19310
d) None of the above

34. Time value of money indicates that

a) A unit of money obtained today is worth more than a unit of money
obtained in future
b) A unit of money obtained today is worth less than a unit of money obtained in
future
c) There is no difference in the value of money obtained today and tomorrow
d) None of the above
Prepared by
Prof. G. Gnanakumar, Asst. Professor / Mechanical,
Panimalar Institute of Technology, Chennai
35. Time value of money supports the comparison of cash flows recorded at
different time period by
a) Discounting all cash flows to a common point of time
b) Compounding all cash flows to a common point of time
c) Using either a or b
d) None of the above.

36. If the nominal rate of interest is 10% per annum and there is quarterly
compounding, the effective rate of interest will be:
a) 10% per annum
b) 10.10 per annum
c) 10.25%per annum
d) 10.38% per annum

37. Relationship between annual nominal rate of interest and annual effective
rate of interest, if frequency of compounding is greater than one:
a) Effective rate > Nominal rate
b) Effective rate < Nominal rate
c) Effective rate = Nominal rate
d) None of the above

38. If nominal rate of return is 10% per annum and annual effective rate of
interest is 10.25% per annum, determine the frequency of compounding:
a) 1
b) 2
c) 3
d) None of the above

39. Heterogeneous cash flows can be made comparable by

a) Discounting technique
b) Compounding technique
c) Either a or b
d) None of the above

40. Money has time value because:

a) Individuals prefer future consumption to present consumption.
b) Money today is more certain than money tomorrow
c) Money today is worth more than money tomorrow in terms of purchasing power.
d) There is a possibility of earning risk free return on money invested today.
Prepared by
Prof. G. Gnanakumar, Asst. Professor / Mechanical,
Panimalar Institute of Technology, Chennai
 e) (b), (c) and (d) above.

41. Given an investment of Rs. 10,000 to be invested for one year;

a) It is better to invest in a scheme that pays 10% simple interest.
b) It is better to invest in a scheme that pays 10% annual compound interest.
c) Both (a) and (b) provide the same return

42. Given an investment of Rs. 10,000 for a period of one year, it is better to
invest in a scheme that pays:
a) 12% interest compounded annually
b) 12% interest compounded quarterly
c) 12% interest compounded monthly
d) 12% interest compounded daily

43. Given an investment of Rs. 10,000 over a period of two years, it is better to
invest in a scheme that pays;
a) 10% interest in the first year and 12% in second year.
b) 12% interest in the first year and 10% in second year.
c) Both (a) and (b) above provide the same return

44. The relation between effective annual rate of interest (re) and nominal rate of
interest (r) is best represented by;

a)

b)

c)
d) None of the above

45. To find the present value of a sum of Rs. 10,000 to be received at the end of
each year for the next 5 years at 10% rate, we use:
a) Present value of a single cash flow table
b) Present value of annuity table.
c) Future value of a single cash flow table
d) Future value of annuity table

46. Sinking fund factor is the reciprocal of:

a) Present value interest factor of a single cash flow.
b) Present value interest factor of an annuity.
c) Future value interest factor of a single cash flow.
d) Future value interest factor of an annuity.

47. If the effective rate of interest compounded quarterly is 16%, then the
nominal rate of interest is:
Prepared by
Prof. G. Gnanakumar, Asst. Professor / Mechanical,
Panimalar Institute of Technology, Chennai
 a) 14.6%
b) 15%
c) 14.8%
d) 15.12%

48. If the interest rate on a loan is 1% per month, the effective annual rate of
interest is:
a) 12%
b) 12.36%
c) 12.68%
d) 12.84%

49. If a loan of Rs. 30,000 is to be paid in 5 annual installments with interest rate
of 12% p.a. then the equal annual installment will be;
a) Rs. 7400
b) Rs. 8100
c) Rs. 7812
d) Rs. 8322

50. X took a housing loan of Rs. 25,00,000. The loan is to be redeemed in 120
monthly installments of Rs. 31,000 each to be paid at the end of each month.
What is the implied interest rate per annum?
a) 8.50%
b) 8.1%
c) 7.70%
d) 9.12%

51. The difference between effective annual rate of interest with monthly and
quarterly compounding, when nominal rate of interest is 10% is;
a) 0.10%
b) 0.14%
c) 0.21%
d) 0.09%

52. A bond has a face value of Rs. 1000 and a coupon rate of 10%. It will be
redeemed after 4 years at 10% premium. Find the present value of bond at a
required rate of 12%:
a) Rs. 1002.80
b) Rs. 960.72
c) Rs. 980.84
d) Rs. 1020.12

53. You want to buy an ordinary annuity that will pay you 4,000 a year for the
next 20 years. You expect annual interest rates will be 8 percent over that

Prepared by
Prof. G. Gnanakumar, Asst. Professor / Mechanical,
Panimalar Institute of Technology, Chennai
 time period. The maximum price you would be willing to pay for the annuity
is closest to
a) 32,000
b) 39,272
c) 40,000
d) 80,000

54. With continuous compounding at 10 percent for 30 years, the future value of
an initial investment of 2,000 is closest to
a) 34,898
b) 40,141
c) 1,64,500
d) 3,28,282

55. In 3 years, you are to receive 5,000. If the interest rate were to suddenly
increase, the present value of that future amount to you would
a) fall
b) rise
c) remain unchanged
d) cannot be determined without more information

56. You are considering investing in a zero-coupon bond that sells for 250. At
maturity in 16 years it will be redeemed for 1,000. What approximate annual
rate of growth does this represent?
a) 8 percent
b) 9 percent
c) 12 percent
d) 25 percent

57. To increase a given present value, the discount rate should be adjusted
a) upward
b) downward
c) same

58. For 1,000 you can purchase a 5-year ordinary annuity that will pay you a
yearly payment of 263.80 for 5 years. The compound annual interest rate
implied by this arrangement is closest to
a) 8 percent
b) 9 percent
c) 10 percent
d) 11 percent

Prepared by
Prof. G. Gnanakumar, Asst. Professor / Mechanical,
Panimalar Institute of Technology, Chennai
59. You are considering borrowing 10,000 for 3 years at an annual interest rate
of 6%. The loan agreement calls for 3 equal payments, to be paid at the end
of each of the next 3 years. (Payments include both principal and interest.)
The annual payment that will fully pay off (amortize) the loan is closest to
a) 2,674
b) 2,890
c) 3,741
d) 4,020

Prepared by
Prof. G. Gnanakumar, Asst. Professor / Mechanical,
Panimalar Institute of Technology, Chennai