ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 41  May 2021 CPA Licensure Examination  Week No. 13

MANAGEMENT ADVISORY SERVICES C.P. Lee  E.S Arañas  K.L. Manuel

MAS-11: QUANTITATIVE TECHNIQUES WITH INVENTORY MANAGEMENT

QUANTITATIVE TECHNIQUES
 QUANTITATIVE TECHNIQUES generally refer to the application of mathematics in actual business operations
so that management decisions are made objectively and efficiently.
 Some of the commonly used quantitative techniques or models are:
 Gantt Chart  Learning Curves
 PERT-CPM  Inventory Models
 Regression & Correlation Analysis [covered in MAS-02: Cost Behavior with Regression Analysis]
 Linear Programming [covered in MAS-05: Relevant Costing with Linear Programming]
 Probability Analysis & Decision Tree Diagram [covered in MAS-06: Budgeting with Probability Analysis]
 PROJECT SCHEDULING TECHNIQUES are especially useful for entities involved in building constructions,
book publishing, new product launching, feasibility studies, R&D projects, and audit planning.
 Common project scheduling techniques include Gantt Chart, ‘PERT’ and Critical Path Method:
 GANTT CHART, invented by American engineer Henry Gantt, is a graphic schedule (usually a horizontal
bar graph) used for planning, controlling and recording progress towards completion of a project.

Tasks Present  The entire project is composed of four

50% tasks (i.e., A, B, C, and D).
A  The project started in January and is
B
30% expected to be finished in April.
 At present (February):
0%
C  All tasks are supposed to be performed
100% simultaneously.
D  Task B has the longest time to finish.
 Task C has not been started yet (0%).
Jan Feb Mar Apr  Task D is finished (100%) ahead of time.

 Program Evaluation and Review Technique (PERT) is a project scheduling technique that uses network
models for planning and controlling large-scale projects that have many interrelated activities. A PERT
network is composed of nodes (representing ‘events’) and arrows (representing ‘activities’):
 EVENT is a discrete moment in time representing the start or finish of an activity.
 ACTIVITY is a task (consumes time and resources) that must be accomplished. Two types are:
1) SERIES – an activity that cannot be performed unless its predecessor activity is done.
2) PARALLEL – activities that can be performed simultaneously.
 PATH is series of activities from start to finish.

A 5  4 events: B, A, E, and D
2  4 activities:
 Parallel: B-A & B-E, A-D & E-D
d d
B D  Series: B-A & A-D, B-E & E-D
a a  2 paths:
y y  Longer path (7): B-A-D – critical!
3 E 2  Shorter path (5): B-E-D

 d
CRITICAL PATH d
is the path that takes the longest time to finish through the PERT network.
 EXPECTED aTIME (te) is the average
a time an activity would require if it were repeated several times.
y y
te = (to + 4 tm + tp) ÷ 6 Where: to - optimistic time; tm – most likely time; tp – pessimistic time
 SLACK TIME is the amount of time an activity can be delayed without delaying the entire project.
 CRITICAL PATH METHOD (CPM), which uses deterministic time and cost estimates, may be considered
as a subset of PERT. CPM also includes the concept of crash time and crash costs.
 NORMAL TIME is the maximum time required to complete an activity at normal costs.
 CRASH TIME is the minimum possible time in which an activity can be completed, usually under
rush or urgent condition, using additional resources (e.g., overtime, extra labor, new machine).
 CRASH COSTS are the costs incurred when a project is completed based on its crash time.
 LEARNING CURVE (a.k.a., Experience Curve) is based on the proposition that labor hours decrease in a
definite pattern as labor operations are repeated. Learning curve describes the efficiencies arising from
experience, because with experience comes increased productivity. This productivity increases with
production size, but at a decreasing rate as diagrammed below:

Units  The time required to perform a given task becomes progressively

produced shorter, but this is applicable only to the early stages of production.
per day
 The learning curve is based on statistical findings that as the
cumulative output doubles, the cumulative average labor input time
,,
required per unit will be reduced by some percentage, ranging
between 10% and 40%.
 The learning curve is usually designated by the complement of the
rate of reduction -- if the rate of reduction is 20%, then there is an
Cumulative Production 80% learning curve.

NOTE: The learning curve-associated formula of “Y=aXb” is not used for CPALE purposes since the exponent
‘b’ requires the use of non-basic calculators to solve logarithm functions.

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-11
Week No. 13: QUANTITATIVE TECHNIQUES with INVENTORY MANAGEMENT

INVENTORY MANAGEMENT
 The central issue in inventory management is to maintain an optimum investment in inventories that
considers a risk-reward tradeoff based on the following: overinvesting in inventory to avoid shortages and
incurring excessive costs vs. underinvesting in inventory to save costs, but incurring the risk of shortages.
 Two general approaches to systems of inventory management:
 MATERIALS REQUIREMENT PLANNING (MRP) is suitable for determining the quantity and order timing of
raw materials based on sales forecast and scheduled production of finished goods.
 “JUST-IN-TIME” (JIT) [covered in MAS-10] is a demand-pull system that focuses on real usage, rather
than sales forecast (as opposed to MRP) in order to maximize space, minimize insurance costs,
eliminate waste (non-value-added activities), lower inventory carrying costs, and free-up capital.
MRP is a computer-based system that focuses on meeting requirements of the ‘projected’ usage or demand
while JIT is very much focused on the current, ‘real’ usage or demand while the system runs.
 MRP must be distinguished from MANUFACTURING RESOURCE PLANNING (MRP-II). MRP II evolved from
early MRP systems by including the integration of additional data, such as employee and financial needs.
MRP-II is a closed-loop system that integrates various functional areas of a manufacturing company (e.g.,
inventories, production, sales and cash flows).
 MRP and MRP-II must be distinguished from ENTERPRISE RESOURCE PLANNING (ERP). ERP integrates the
information systems of the whole enterprise where organizational operations are inter-connected while the
organization itself is connected with its customers and suppliers.
 Activity-Based Costing (under MAS-10) must be distinguished from inventory management’s ABC
Classification system. ABC Classification system is an inventory categorization method based on the Pareto
Principle in economics (“In any group, there are significant few and insignificant many”):
 A items – high-value items (relatively few in number) requiring highest possible control
 B items – medium-value items requiring normal or moderate control
 C items – low-value items (relatively many in number) requiring the simplest possible control
 INVENTORY MODEL exists to address two basic inventory management questions:
1) “How many units should be ordered?”
ECONOMIC ORDER QUANTITY (EOQ) refers to the order size (number of units) that minimizes the sum
of ordering costs and carrying costs.
 CARRYING COSTS – increases with order size and units of inventory on hand.
Examples: Storage, insurances, normal spoilage, security, record keeping
 ORDERING COSTS – decreases with order size and units of inventory on hand.
Examples: Delivery, inspection, handling, purchasing, receiving, quantity discount lost

Where: D  Annual Demand or usage in units

2DO
EOQ = O  Costs of placing one Order
C C  Cost of Carrying one unit for one year
Carrying Costs = (EOQ ÷ 2) x C Where: (EOQ ÷ 2)  Average inventory in units
Ordering Costs = (D ÷ EOQ) x O Where: (D ÷ EOQ)  Number of orders per year
NOTE: If safety stock is maintained, then average inventory = (EOQ ÷ 2) + safety stock
Assumptions & limitations of EOQ model:
1. Demand occurs evenly at a constant rate throughout the year.
2. For each order, units are received in a single delivery and lead time is constant or does not vary.
3. The unit cost of the inventory is constant; hence, there can be no quantity discounts.
4. There is no limit as to the order size or the number of units that may be ordered.
2) “When should the unit be reordered?”
REORDER POINT refers to the number of units at which goods should re-ordered to minimize on the
sum of carrying costs and stock-out costs.
 STOCK-OUT COSTS are opportunity costs and other costs incurred when an item is out of stock
(e.g., lost contribution margin on sales)

Reorder Point = Delivery Time Stock + Safety Stock

(Alternative Formula: Reorder Point = Maximum Lead Time x Average Usage per Unit of Time)
Where: Delivery Time Stock = Normal Lead Time x Average Usage per Unit of Time
Safety Stock = (Maximum Lead Time – Normal Lead Time) x Average Usage per Unit of Time
LEAD TIME is period from the time an order is placed until such time the same order is received.
 Normal/Average lead time - this refers to the usual delay in the receipt of ordered goods
 Maximum lead time - this adds to normal lead time a reasonable allowance for further delay
SAFETY STOCK (a.k.a. buffer stock) refers to the extra number of units maintained to protect against
stock-out costs during periods of uncertain lead time and demand. Alternatively, safety stock may be
computed using the demand-based formula: (Maximum Usage – Normal Usage) x Normal Lead Time
 Applications of EOQ:
 When used for production, EOQ becomes the ECONOMIC LOT SIZE (ELS):
Where: P  Annual Production in units
2PS
ELS = S  Setup costs per batch of production
C C  Cost of Carrying one unit for one year
 When used for cash management, EOQ becomes the OPTIMAL CASH BALANCE or the “Baumol Model.”
[The Baumol model shall be thoroughly discussed in MAS-12 (Working Capital Management).]

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-11
Week No. 13: QUANTITATIVE TECHNIQUES with INVENTORY MANAGEMENT

EXERCISES: QUANTITATIVE TECHNIQUES with INVENTORY MANAGEMENT

1. PERT network
Paubaya Construction, Inc. will soon begin to work on a building project. The construction firm’s schedule
of activities and related expected completion time are presented in the following time table:
Activity Code Activity Description Estimated Time (in weeks)
A–B Obtain on-site work permits 3
B–E Repair damages done by vandals 7
B–C Inspect construction materials left on site 1
C–E Order and receive construction materials 2
C–D Apply for waiver to add new materials 1
D–E Obtain waiver to add new materials 3
E–F Perform electric work 6
F–G Complete interior partitions 4
REQUIRED:
A) Prepare the PERT network.
B) Determine the critical path and its completion time in weeks.
C) Determine the shortest path and its slack time in weeks.

2. Critical Path Method & Expected Time

E-Why & Co., one of the leading accounting firms, is planning for a certain audit engagement based on the
following PERT network (time in days):

START
A FINISH

L I S T

U
REQUIRED:
A) Determine the expected time (te) for each activity.
B) Identify the critical path(s).
C) What is the shortest time in days to complete the entire project?
3. Crash Time & Crash Costs
Mimiyuuuh Builders uses the critical path method to monitor construction jobs. The company is currently 2
weeks behind schedule on Job #168, which is subject to a P 10,500 per week completion penalty.
Mimiyuuuh desires to reduce the normal completion time of Job #168 and, at the same time, report the
highest possible income. Path A-B-C-F-G-H-I has a normal completion time of 20 weeks, and a critical path
A-D-E-F-G-H-I has a normal completion time of 22 weeks. The following activities can be crashed:
Activities Cost to Crash 1 Week Cost to Crash 2 Weeks
BC P 8,000 P 15,000
DE 10,000 19,600
EF 8,800 19,500
What activity (activities) should Mimiyuuuh crash?
a. Activity EF (2 weeks) c. Activity BC (1 week) & activity EF (1 week)
b. Activity BC (1 week) & activity DE (1 week) d. Activity DE (1 week) & activity EF (1 week)
4. Learning Curve
A particular manufacturing job is subject to an estimated 80% learning or experience curve. The first unit
required 20 labor hours to complete.
REQUIRED:
A) What is the cumulative average time per unit after four (4) units are completed?
B) How many hours are required to produce a total of two (2) units?
C) How many hours are required to produce the second unit?
D) Which of the following unfavorable variances would be directly affected by the relative position of a
production process on the learning curve?
a. Material price c. Labor rate
b. Material usage d. Labor efficiency
5. Economic Order Quantity
Jimin Company requires 40,000 units for its signature product BTS. The units will be used evenly
throughout the year. The cost to place one order is P 20 while the cost to carry the inventory for one year
is P 0.40 per unit.
REQUIRED:
A) Determine the optimal order quantity (EOQ).
B) How many orders should be placed within the year?
C) How often should the units be ordered within a year?
D) Determine the average inventory in units.

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-11
Week No. 13: QUANTITATIVE TECHNIQUES with INVENTORY MANAGEMENT

6. Carrying Costs vs. Ordering Costs

Based on an EOQ analysis, the optimal order quantity is 4,000 units. Annual inventory carrying costs equal
30% of the average inventory level. The company pays P 10 per unit to buy the product and P 400 to place
an order. The monthly demand for the product is 5,000 units.
REQUIRED: Determine the following:
A) Annual inventory carrying costs.
B) Annual inventory ordering costs.
C) Total inventory costs.

7. Reorder Point & Safety Stock

EZ Mil Company purchases 7,500 units of its lone product per annum. The company works 300 days per
year. The normal purchase lead time is 7 working days while maximum lead time is 10 working days.

REQUIRED:
A) How many units should EZ Mil maintain as safety (buffer) stock?
B) What is EZ Mil’s reorder point for the laundry soaps?
8. Stock-Out Costs
Each stock-out of a product sold by Pingleni Company costs P 2,000 per occurrence. The carrying cost per
unit of inventory is P 5 per year and the company orders 1,500 units of product 18 times a year at a cost of
P 200 per order. The probability of a stock-out at various levels of safety stock is:

Units of Safety Stock Probability of a Stock-Out

0 50%
200 30%
400 14%
600 5%
800 1%
What is the optimal level of safety stock for Pingleni?
a. 200 units c. 600 units
b. 400 units d. 800 units
9. Economic Lot Size
SM (Soriano-Manuel) Bookstore publishes a book about RFBT. SM prints 5,000 copies of the book evenly
throughout the year. The set-up cost is P 10 while the optimal production run (economic lot size) is 200.
REQUIRED:
How much is the unit carrying cost of the book per year?
WRAP-UP EXERCISES (MULTIPLE-CHOICE)
1. Which of the following is heavily weighted in calculating PERT’s expected time?
a. Idealistic time c. Optimistic time
b. Most likely time d. Pessimistic time
2. The critical path through a PERT network is the path that has (the)
a. Zero slack time c. Shortest completion time
b. Highest slack time d. Uncertain completion time
3. An 80% learning curve means that:
a. The incremental time for each unit is 80% of the time of the unit before it
b. The cumulative average time is 80% of the cumulative average time at the previous unit
c. As production doubles, the incremental time for a unit is 80% of the time at the previous
doubling point
d. As production doubles, the cumulative average time is 80% of the time at the previous
doubling point
4. A computerized inventory system that simulates needed materials for the finished product, and then
compares production need to available inventory balance to determine when orders should be placed.
a. EOQ system c. Just-In-Time system
b. Electronic Data Interchange d. Material Requirements Planning System
5. In ABC classification system of inventory control, class “A” inventory consists of
a. Few low-value items c. Many low-value items
b. Few high-value items d. Many high-value items
6. The optimal level of inventory would be affected by all of the following, except the:
a. Cost per unit of inventory
b. Current level of inventory
c. Usage rate of inventory per time period
d. Cost of placing an order for the merchandize
7. The purpose of economic order quantity (EOQ) is to minimize
a. the safety stock
b. the inventory quantities
c. the sum of the demand costs and the back-log costs
d. the sum of the ordering costs and holding (carrying) costs
8. Which of the following is not considered a cost of carrying inventory?
a. Shipping and handling c. Insurance
b. Property tax d. Depreciation and obsolescence

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-11
Week No. 13: QUANTITATIVE TECHNIQUES with INVENTORY MANAGEMENT

9. The ordering costs associated with inventory management include

a. Insurance costs, purchasing costs, shipping costs, and spoilage
b. Obsolescence, setup costs, quantity discounts lost, and storage costs
c. Purchasing costs, shipping costs, setup costs, and quantity discounts lost
d. Shipping costs, obsolescence, setup costs, and capital invested
10. In inventory management, the safety stock will tend to increase if the
a. Carrying cost increases c. Variability of the lead time increases
b. Cost of running out of stock decreases d. Variability of the usage rate decreases

SELF-TEST QUESTIONS – with suggested answers to selected items

(Sources: CMA/CIA/RPCPA/AICPA/Various test banks)
Answers to some items shall be given during Week 13 discussion

1.PERT and the critical path method (CPM) are used for
B a. Determining product costs
b. Project scheduling and control
c. Determining the optimal product mix
d. Determining the number of servers needed in a fast-food restaurant
2. The Gantt chart used in project management combines which of the following functions?
C a. Planning and leveling c. Planning and scheduling
b. Scheduling and evaluating d. Scheduling and controlling
3. A company is controlling a complex project by focusing on activities that have the greatest influence on the project’s
estimated completion date. What quantitative technique is most relevant to the company?
C a. Cost-volume-profit analysis c. Program evaluation review technique
b. Parametric programming d. Queuing analysis
4. Program evaluation and review technique (PERT) is a system that uses:
D a. Least square method c. Economic Order Quantity (EOQ) formula
b. Linear programming d. Network analysis
5. When using PERT, the expected time for an activity when given an optimistic time (A), a pessimistic time (B), and a
most likely time (m) is calculated by which one of the following formulas?
C a. (b – a) ÷ 2 c. (a + 4m + b) ÷ 6
b. (a + b) ÷ 2 d. (4abm) ÷ 6
6. Orange Firm is considering a research project. The time estimates for completion of the project are:
Optimistic: 2 months Most likely: 4 months Pessimistic: 9 months
Using PERT-CPM approach, what is the expected time for completion of the project?
a. 4 months c. 5 months
b. 4.5 months d. 5.5 months
7. The critical path is the
D a. maximum amount of time an activity may be delayed without delaying the entire project
b. earliest starting time that an activity for a project can begin
c. pessimistic time estimate for an activity of a project
d. longest time path from the first event to the last event for a project
8. Apple Company presents the following PERT-CPM data for a certain project:
Activity Time in Weeks Preceding Activity
A 3 -
B 3 A
C 7 A
D 4 A
E 2 B
F 4 B
G 1 C,E
H 5 D
Determine the project’s (A) completion time of the critical path and (B) slack time of the shortest path.
a. (A) 12 weeks (B) 3 weeks c. (A) 11 weeks (B) 2 weeks
b. (A) 12 weeks (B) 2 weeks d. (A) 10 weeks (B) 1 week
9. The primary difference between PERT and CPM is that
D a. CPM uses probabilities on the activity times and PERT does not
b. PERT considers activity costs and CPM does not
c. PERT can assign probabilities to activity times and CPM does not
d. CPM considers activity costs and PERT does not
10. When doing a cost-time trade-off in PERT analysis, the first activity that should be crashed is the activity
D a. With the largest amount of slack
b. With lowest unit crash cost
c. On the critical path with the maximum possible time reduction
d. On the critical path with the lowest unit crash cost
11. A Gantt chart
D a. Shows the critical path for a project
b. Is used for determining an optimal product mix
c. Shows only the activities along the critical path of a network
d. Does not necessarily show the critical path through a network

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-11
Week No. 13: QUANTITATIVE TECHNIQUES with INVENTORY MANAGEMENT

12. If a cost function behaves that the average costs per unit of output decline systematically as cumulative production
doubles, the cost function is referred to as a:
B a. Parabolic curve c. Linear cost curve
b. Learning curve d. Growth curve
13. What is the cost factor that is LEAST likely to be affected by the learning curve?
A a. Materials c. Indirect labor
b. Direct labor d. Variable overhead
14. A particular manufacturing job is subject to an estimated 90% learning curve. The first unit required 50 labor hours to
complete. What is the cumulative average time per unit after four units are completed?
a. 50 hours c. 40.5 hours
b. 45 hours d. 40 hours
15. Orange Company expects a 90% learning curve. The first batch of a new product required 100 hours. The second
batch should take:
a. 100 hours c. 80 hours
b. 90 hours d. 45 hours
16. Mango Company manufactured the first batch of product in 10 hours. The second batch took an additional 6 hours.
What percentage learning occurred?
a. 100% c. 80%
b. 90% d. 60%
17. Kiwi Company used 30 hours to produce the first batch of units. The second batch took an additional 18 hours. How
many hours will the first four batches require?
a. 48 hours c. 96.2 hours
b. 76.8 hours d. 120.0 hours
18. The following information on the utilization of a new software package was collected:
Number of tasks Total time to perform all tasks Average time to perform each task
1 10 minutes 10 minutes
2 18 minutes 9 minutes
4 32.4 minutes 8.1 minutes
If this learning effect continues, what is the average time to perform each of the first eight (8) tasks?
B a. 6.83 minutes c. 7.75 minutes
b. 7.29 minutes d. 8.10 inutes
19. The average labor cost per unit for the first batch produced by a new process is P 120. The cumulative average labor
cost after the second batch is P 72 per product. Using a batch size of 100 and assuming the learning curve continues,
what is the total labor cost of four batches?
D a. P 4,320 c. P 2,592
b. P 10,368 d. P 17,280
20. Fruit Point Manufacturing recently completed and sold an order of 50 units that had the following costs:
Direct materials P 1,500
Direct labor 8,500
Variable overhead 4,000*
Fixed overhead 1,400**
TOTAL P 15,400
* Applied on the basis of direct labor hours. ** Applied at the rate of 10% of variable cost.
The company has been requested to prepare a bid for 350 units of the same product
If an 80% learning curve is applied, what is the total cost on the bid-order for 350 units?
a. P 26,400 c. P 37,950
b. P 31,790 d. P 54,120
21. The economic order quantity formula indicates that
D a. Annual quantity of inventory to be carried c. Safety stock plus estimated inventory for the year
b. Annual usage of materials during the year d. Quantity of each individual order during the year
22. Which of the following is NOT involved in the computation of the economic order quantity?
A a. Lead-time from order placement until order fulfillment
b. Number of units expected to be sold or used during the year
c. Cost of placing and receiving an order
d. Cost of obtaining capital as carrying costs
23. One of the elements included in the economic order quantity (EOQ) formula is
B a. Safety stock c. Selling price of the item
b. Yearly demand d. Lead time for the delivery
24. The following data refer to various annual costs relating to the inventory of a single-product company:
Unit freight on purchase P 0.20
Storage per unit P 0.12
Insurance per unit P 0.10
Annual interest foregone from alternate investment of funds P 8,000
Annual number of units required 100,000
What is the annual carrying cost per unit?
a. P 0.22 c. P 0.42
b. P 0.30 d. P 0.50
25. Melon Company sells 20,000 radios evenly throughout the year. The cost of carrying one unit in inventory for one year
is P 8, and the purchase order cost per order is P 32. What is the economic order quantity?
B a. 200 units c. 500 units
b. 400 units d. 600 units

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-11
Week No. 13: QUANTITATIVE TECHNIQUES with INVENTORY MANAGEMENT

26. Tamarind Company manufactures bookcases. Set up costs are P 2.00. Tamarind manufactures 4,000 bookcases
evenly throughout the year. Using the economic order quantity approach, what is the optimal production run would be
200 when the cost of carrying one bookcase in inventory for one year?
D a. P 0.05 c. P 0.20
b. P 0.10 d. P 0.40
27. Pomelo, Inc. has determined the following for a given year:
Economic order quantity (standard order size) 5,000 units
Total cost to place purchase orders for the year P 10,000
Cost of place one purchase order P 50
Cost carry one unit for one year P4
What is Pomelo’s estimated annual usage in units?
a. 1,000,000 c. 4,000,000
b. 2,000,000 d. 2,250,000
28. Jackfruit Company has computed its EOQ as 500 units. However, management would rather order in quantities of 600
units. How will Jackfruit’s total purchase order cost and total annual carrying cost for an order quantity of 600 units
compared to the respective amounts for an EOQ of 500 units?
D a. Higher purchase order cost and higher carrying cost.
b. Lower purchase order cost and lower carrying cost.
c. Higher purchase order cost and lower carrying cost.
d. Lower purchase order cost and higher carrying cost.
29. Which of the following would tend to increase the holdings of inventory quantity in the future?
B a. Increased computer control c. Standardization of products
b. Increased rate of sales growth d. Limiter variety of products
30. The amount of inventory that a company would tend to hold in stock would increase as the
B a. Variability of sales decreases
b. Cost of carrying inventory decreases
c. Cost of running out of stock decreases
d. Sales level fails to a permanently lower level
31. Which statement best summarizes the factor that affects the level of safety stock that a firm will carry?
D a. The amount of idle cash that management believes it has to invest in safety stock
b. The rapidity with which the inventory position will turn over
c. The level of production the firm’s bank is willing to finance
d. The level of uncertainty with respect to a stock-out condition that management is willing to accept
32. A company has EOQ of 10,000 units and a safety stock of 2,000 units. The cost per unit of inventory is P 5.00 and the
carrying cost is 10% of the average value of inventory. What is the annual inventory carrying cost?
B a. P 3,000 c. P 5,000
b. P 3,500 d. P 6,000
33. The following information relates to Pear Company’s raw materials:
Annual usage in units 7,200 Normal lead time in days 20
Working days per year 240 Maximum lead time in days 45
Assuming even demand for materials during the year, what is the (A) safety stock and (B) order point?
D a. (A) 600 (B) 750 c. (A) 750 (B) 600
b. (A) 600 (B) 1,350 d. (A) 750 (B) 1,350
34. The annual demand for a single product is 4,000 units. The cost to carry one unit is P 0.50 while cost per order
amounts to P 10.00. The average inventory being carried is computed for 225 units. How many units of safety stock
are being maintained?
a. 25 units c. 200 units
b. 50 units d. None
35. Guyabano Company wishes to determine the amount of safety stock they should maintain for Product No. 333 to result
in the lowest cost. Each stock-out costs P 75 and the carrying costs of each unit of safety stock is P 1. Product No.
333 will be ordered five times a year.
Which of the following will produce the lowest cost?
C a. A safety stock of 10 units that is associated with a 40% probability of running out of stock
b. A safety stock of 20 units that is associated with a 20% probability of running out of stock
c. A safety stock of 40 units that is associated with a 10% probability of running out of stock
d. A safety stock of 80 units that is associated with a 5% probability of running out of stock
36. India operates a chain of hardware stores across Manila. The controller wants to determine the optimum safety stock
levels for an air purifier unit. The inventory manager compiled the following data:
 The annual carrying cost of inventory approximates 20% of the investment in inventory.
 The inventory investment per unit averages P 50.
 The stock-out cost is estimated to be P 5 per unit.
 The company orders inventory on the average of 10 times per year.
 The probabilities of a stock-out per order cycle with varying levels of safety stock are as follows:
Safety Stock Stock-out Probability
200 units 0 0%
100 units 100 units 15%
0 100 units 15%
0 200 units 12%
What is the total cost of safety stock on an annual basis with a safety stock level of 100 units?
B a. P 550 c. P 1,950
b. P 1,750 d. P 2,000

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