Test Prep Test Prep Certifications BUSINESS-ENVIRONMENT-AND-CONCEPTS Questions & Answers

• Question 21:

  Which one of the following financial instruments generally provides the largest source of short-term credit for small firms?

  A. Installment loans.

  B. Commercial paper.

  C. Trade credit.

  D. Bankers' acceptances.

  Correct Answer: C

  Choice "c" is correct. Trade credit generally provides the largest source of short-term credit for small firms. Choices "a", "b", and "d" are incorrect, per the above Explanation.

• Question 22:

  A company obtained a short-term bank loan of $500,000 at an annual interest rate of eight percent. As a condition of the loan, the company is required to maintain a compensating balance of $100,000 in its checking account. The checking account earns interest at an annual rate of three percent. Ordinarily, the company maintains a balance of $50,000 in its account for transaction purposes. What is the effective interest rate of the loan?

  A. 7.77 percent.

  B. 8.50 percent.

  C. 9.44 percent.

  D. 8.56 percent.

  Correct Answer: D

  Choice "d" is correct. 8.56%. To calculate the effective annualized percentage cost of financing: Choices "a", "b", and "c" are incorrect, per the above calculation.

  

• Question 23:

  A company obtained a short-term bank loan of $250,000 at an annual interest rate of 6 percent. As a condition of the loan, the company is required to maintain a compensating balance of $50,000 in its checking account. The company's checking account earns interest at an annual rate of 2 percent. Ordinarily, the company maintains a balance of $25,000 in its checking account for transaction purposes. What is the effective interest rate of the loan?

  A. 6.44 percent.

  B. 7.11 percent.

  C. 5.80 percent.

  D. 6.66 percent.

  Correct Answer: A

  Choice "a" is correct. 6.44%. To calculate the effective interest rate:

  

• Question 24:

  Edwards Manufacturing Corporation uses the standard Economic Order Quantity (EOQ) model. If the EOQ for Product A is 200 units and Edwards maintains a 50-unit safety stock for the item, what is the average inventory of Product A?

  A. 250 units.

  B. 150 units.

  C. 125 units.

  D. 100 units.

  Correct Answer: B

  Choice "b" is correct. 150 units is the average inventory including a 50-unit safety stock.

  

  Choices "a", "c", and "d" are incorrect, per the above calculation.

• Question 25:

  When the Economic Order Quantity (EOQ) model is used for a firm, which manufactures its inventory, ordering costs consist primarily of:

  A. Insurance and taxes.

  B. Storage and handling.

  C. Production set-up.

  D. Cost of funds.

  Correct Answer: C

  Choice "c" is correct. When the economic order quantity (EOQ) model is used for a firm that manufactures

  its own inventory, ordering costs consist primarily of production set-up.

  Choices "a", "b", and "d" are incorrect, per the above Explanation.

• Question 26:

  An example of a carrying cost is:

  A. Disruption of production schedules.

  B. Quantity discounts lost.

  C. Handling costs.

  D. Obsolescence.

  Correct Answer: D

  Choice "d" is correct. Obsolescence is an example of a carrying cost. Choices "a", "b", and "c" are incorrect. Carrying cost is not:

  A. Disruption of production schedules.

  B. Quantity discounts lost.

  C. Handling costs.

• Question 27:

  Handyman Inc. operates a chain of hardware stores across New England. The controller wants to determine the optimum safety stock levels for an air purifier unit. The inventory manager has compiled the following data.

  •

  The annual carrying cost of inventory approximates 20 percent of the investment in inventory.

  •

  The inventory investment per unit averages $50.

  •

  The stockout cost is estimated to be $5 per unit.

  •

  The company orders inventory on the average of ten times per year.

  •

  Total cost = carrying cost + expected stockout cost.

  •

  The probabilities of a stockout per order cycle with varying levels of safety stock are as follows.

  

  The total cost of safety stock on an annual basis with a safety stock level of 100 units is:

  A. $1,750

  B. $1,950

  C. $2,000

  D. $650

  Correct Answer: A

  Choice "a" is correct. $1,750 total annual cost of safety stock of 100 units.

  

  Choices "b", "c", and "d" are incorrect, per the above calculation.

• Question 28:

  Which one of the following would not be considered a carrying cost associated with inventory?

  A. Insurance costs.

  B. Cost of capital invested in the inventory.

  C. Cost of obsolescence.

  D. Shipping costs.

  Correct Answer: D

  Choice "d" is correct. Shipping costs (which are selling costs) would not be considered a carrying cost

  associated with inventory.

  Choices "a", "b", and "c" are incorrect. Each of the following would be considered a carrying cost

  associated with inventory.

  A. Insurance costs.

  B. Cost of capital invested in the inventory.

  C. Cost of obsolescence.

• Question 29:

  All of the following are inventory carrying costs, except:

  A. Insurance.

  B. Opportunity cost on inventory investment.

  C. Obsolescence and spoilage.

  D. Inspections.

  Correct Answer: D

  Choice "d" is correct. Inspections. Inspections are part of order costs, not carrying costs. Choices "a" and "c" are incorrect. Inventory carrying costs include all costs associated with warehousing (storing) inventory (e.g., storage, insurance, obsolescence, and spoilage associated with holding inventory). Choice "b" is incorrect. The economic cost of holding inventory includes the implicit (opportunity) cost of foregoing a return on the money invested in inventory.

• Question 30:

  The following information regarding inventory policy was assembled by the JRJ Corporation. The company uses a 50-week year in all calculations.

  

  The reorder point is:

  A. 3,300 units.

  B. 2,100 units.

  C. 1,300 units.

  D. 5,200 units.

  Correct Answer: B

  Choice "b" is correct. A 50-week year would mean that 200 units are sold per week (10,000 units per year over 50 weeks). Therefore, 800 units are sold during the lead-time (4 weeks ?200 units per week). Required safety stock is 1,300 units, which means that no less than 1,300 units must be on hand at any time. The reorder point is then 2,100 units (1,300 safety stock plus the 800 units used during lead time). Choices "a", "c", and "d" are incorrect, per the above Explanation.