ACCT3203 Week 6 Tutorial Questions Investment Management S2 2022

I have a mid-exam from 2pm to 4pm on 13th of the September and I saw that we only have
online tut on Tuesday, so maybe at that day I’m not able to attend the tut.
I couldn’t get my attendance mark, right?

1. Among different types of costs associated with inventory, the incoming freight
charges of inventories are ___________.

a. purchasing costs
b. ordering costs
c. stockout costs
d. carrying costs
e. None of the answers.

2. The economic order quantity model completely ignores ________.

a. carrying costs
b. ordering costs
c. stockout costs
d. the size of a purchase order
e. None of the answers.

3. Increases in the carrying cost-- denominator and decreases in the ordering cost per
purchase order--numerator result in ________.

a. smaller EOQ amounts

b. larger EOQ amounts
c. larger relevant total costs
d. smaller relevant total costs
e. None of the answers.

4. Under economic-order-quantity decision model, which of the following is an

assumption? It is assumed that ___________.

a. the quantity ordered can vary at each reorder point same quantity
b. demand, ordering costs, and carrying costs are uncertain certain

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c. the purchasing cost per unit is affected by the order quantity unaffected
d. the same quantity is ordered at each reorder point
e. None of the answers.

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5. Which of the following statements is true of the economic-order-quantity decision
model?

a. It assumes purchasing costs are relevant because the cost per unit changes due to the
quantity ordered. irrelevant
b. Demand, ordering costs, and carrying costs are all known with certainty.
c. It assumes that stockout costs are relevant even if no stockouts occur. No stock-outs
occur
d. It assumes that ordering costs and carrying costs are irrelevant. relevant
e. None of the answers.

6. One of Alpha Company’s products has the following information:

Annual requirements 7,800 units

Cost of placing one order $ 22
Annual cost of carrying one unit $4.50
Cost per unit of carrying insufficient stock-stock- $ 2
out costs

Compute the economic order quantity of the product.

a. 57 units
b. 230 units
c. 277 units
d. 490 units EOQ= [(2x7800x22)/4.5]^1/2
e. None of the answers.
Round it up

7. Alpha Company produces a designer product, and has the following information
available concerning its inventory items:

Relevant ordering costs per purchase order $250

Relevant carrying costs per year for each package:
Required annual return on investment 12%
Required other costs per year $7

Annual demand is 12,000 packages per year. The purchase price per package is $112.
How many deliveries will be required at the economic order quantity?

a. 13 deliveries
b. 23 deliveries
c. 32 deliveries
d. 26 deliveries
e. None of the answers.
unit carrying costs= 112x12%+7= 20.44
equation: return on investment +required other costs

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EOQ= [(2 x 12000 x 250)/20.44]^1/2=541.795 12000/541.795==22.15

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8. Jack’s Tracks sells 24,000 custom-designed GoKarts per year. These GoKarts are sold
evenly throughout the year. The manufacturer charges Jack a $50 processing cost per order,
and Jack incurs a carrying cost of $240 per year including storing each GoKart at a local
warehouse. What is the economic order quantity for ordering materials?

a. 100 EOQ= [(2x24000x50)/240]^1/2

b. 1,000
c. 2,000
d. 10,000
e. None of the answers.
Optimal quantity for each purchase order—quantity that minimizes annual relevant total cost

9. Gamma Company has only one product line. For that line, the reorder point is 550
units, the lead time for production is four weeks, and the sales is estimated at 75 units
per week. Gamma’s safety stock is __________.

a. 250
b. 350
c. 500
d. 650
e. None of the answers.

Reorder Point = Safety Stock + (Purchase order lead time × Number of units sold per week)
Safety Stock = 550 – (4x75) = 250

10. Beta manufacturers and sells 15,000 customer designer bags per year, each requiring
two metres of a specially manufactured fabric. These bags are sold evenly throughout
the year. The materials for these bags require three months’ lead time. Beta desires to
maintain a safety stock of sufficient material to meet one month’s demand. What is
Beta’s reorder point for the fabric?

a. 2,500
b. 7,500
c. 10,000
d. 12,000
e. None of the answers.

fabric per month: (15000/12) x 2 = 2500

Reorder Point = 2500 + ( 3 x 2500) = 10000
When the fabric is lower 10,000, the business should issue a new order to the supplier
Learn how to interpret it!

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Question 11 Solution:

RightTime (RT) Corporation operates a retail store featuring wristwatches. It maintains an

EOQ decision model to make inventory decisions. Currently, it is considering inventory
decisions for its TagMe wristwatches product line, which is a very popular product line. Data
for 2021 are as follows:

Expected annual demand for TagMe watches 7,000

Ordering cost per purchase order $300
Carrying cost per year $14 per wristwatch

Each watch costs RT $75, and sells for $200. The $14 carrying cost per jersey per year
consists of the required return on investment of $9.00 (12% × $75 purchase price) plus $5.00
in relevant insurance, handling, and storage costs. The purchasing lead time is 10 days. RT is
open 365 days a year.

Required:
a. Calculate the EOQ for the TagMe product line.
b. Calculate the number of orders that will be placed each year.
c. Calculate the reorder point.

1. D = 7,000 watches per year, P = $300, C = $14 per watch per year
EOQ = [(2x7000x300)/14]^1/2 = 547.72---548

2. Number of orders per year = 7000/ 548 = 12.77 ---13 orders

3. demand each working day = 7000/ 365 = 19.18 watches per day

Purchase lead time= 10 days

Reorder point = 19.18  10

= 191.8 -- 192 watches

Question 12 Solution (continuation of Question 11):

MakeWatch (MW) manufactures the TagMe wristwatches that RightTime (RT) sells to its
customers. MW has recently installed a computer software that enables its customers to
conduct “one-stop” purchasing using state-of-the-art Web site technology. RT’s ordering cost
per purchase order will be $50 using this new technology.

Required:
a. Calculate the EOQ for the TagMe wristwatches using the revised ordering cost of $50 per
purchase order. Assume all other data from Exercise 20-21 are the same. Comment on the
result.
b. Suppose MW proposes to “assist” RT by allowing RT customers to order directly from

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 the MW Web site. MW would ship their product directly to these customers. MW would
pay $20 to RT for every TagMe watch purchased by one of RT’s customers. Comment
qualitatively on how this offer would affect inventory management at RT. What factors
should RT consider in deciding whether to accept MW’s proposal?

a. D = 7,000 watches per year, P = $50, C = $14 per watch per year
EOQ = [(2x7000x50)/14]^1/2 = 223.61 ---224

The decrease of ordering cost reduced the EOQ from 548 to 224

b. The MW proposal has both upsides and downsides. The upside is potentially higher sales.
RT customers may purchase more online than if they have to physically visit a store. As a
result of the proposal, RT would have lower administrative costs and would need to hold
lower inventories (as more sales occur directly through MW’s Web site) resulting in lower
inventory carrying costs.
The downside is that MW could capture RT’s customers. Repeat customers to the MW Web
site need not be classified as RT customers. RT would have to establish enforceable rules to
make sure that it captures ongoing revenues from customers it directs to the MW Web site.
There is insufficient information to determine whether RT should accept MW’s proposal.
Much depends on whether RT views MW as a credible, “honest” partner.