IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 831:

  The Stewart Co. uses the economic order quantity (EOQ) model for inventory management.A decrease in which one of the following variables would increase the EOQ?

  A. Annual sales.

  B. Cost per order.

  C. Safety stock level.

  D. Carrying costs.

  Correct Answer: D

• Question 832:

  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

• Question 833:

  The result of the economic order quantity formula indicates the

  A. Annual quantity of inventory to be carried.

  B. Annual usage of materials during the year.

  C. Safety stock plus estimated inventory for the year.

  D. Quantity of each individual order during the year.

  Correct Answer: D

  The EOQ model is a deterministic model that calculates the ideal order (or production lot) quantity given specified demand, ordering or setup costs, and carrying costs. The model minimizes the sum of ,,inventory carrying costs and either ordering or production setup costs.

• Question 834:

  In inventory management, the safely stock will tend to increase if the

  A. Carrying cost increases.

  B. Cost of running out of stock decreases.

  C. Variability of the lead time increases.

  D. Variability of the usage rate decreases.

  Correct Answer: C

  A company maintains safely stocks to protect itself against the losses caused by stock outs. These can take the form of lost sales or lost production time. Safely stock is necessary because of the variability in lead time and usage rates. As the variability in lead time increases, a company will tend to carry larger safely stocks.

• Question 835:

  The amount of inventory that a company would tend to hold in stock would increase as the

  A. Sales level falls to a permanently lower level.

  B. Cost of carrying inventory decreases.

  C. Variability' of sales decreases.

  D. Cost of running out of stock decreases.

  Correct Answer: B

  Inventory management attempts to minimize the total costs of ordering, carrying inventory, and stock outs. Thus, affirm incurs carrying costs to reduce ordering and stock out costs. If the cost of carrying inventory declines, the inventory level must increase to minimize total inventory costs.

• Question 836:

  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.

  Correct Answer: C

  Ordering costs are costs incurred when placing and receiving orders. Ordering costs include purchasing costs, shipping costs, setup costs for a production run, and quantity discounts lost.

• Question 837:

  An example of a carrying cost is

  A. Disruption of production schedules.

  B. Quantity discounts lost.

  C. Handling costs.

  D. Spoilage.

  Correct Answer: D

  Inventory costs fall into three categories: order or set-up costs, carrying (holding) costs, and stock out costs. Carrying costs include storage costs for inventory items plus opportunity cost (i.e., the cost incurred by investing in inventory rather than making an income-earning investment). Examples are insurance, spoilage, interest on invested capital, obsolescence, and warehousing costs.

• Question 838:

  Which one of the following would not be considered a caring cost associated with inventor?

  A. Insurance costs.

  B. Cost of capital invested in the inventory.

  C. Cost of obsolescence.

  D. Shipping costs

  Correct Answer: D

  Carrying costs are incurred to hold inventory. Examples include such costs as warehousing. insurance, the cost of capital invested in inventories, inventory taxes, and the cost of obsolescence and spoilage. Neither shipping costs northe initial cost of the inventory are caring costs.

• Question 839:

  The economic order quantity (EOQ) formula can be adapted in order for a firm to determine the optimal split between cash and marketable securities. The EOQ model assumes all of the following except that

  A. The cost of a transaction is independent of the dollar amount of the transaction.

  B. Interest rates are constant over the short run.

  C. There is an opportunity cost associated with holding cash, beginning with the first dollar.

  D. Cash flow requirements are random.

  Correct Answer: D

  The EOQ formula is a deterministic model that requires a known demand for inventory or, in this case, the amount of cash needed. Thus, the cash flow requirements cannot be random. The model also assumes a given carrying (interest) cost and a flat transaction cost for converting marketable securities to cash, regardless of the amount withdrawn.

• Question 840:

  Flynn Company's budgeted sales for the coming year are expected to be $50,000,000, of which 75% are expected to be credit sales at terms of n/30. Flynn estimates that a proposed relaxation of credit standards will increase credit sales by 25% and increase the average collection period from 20 days to 30 days. Based on a 360-dayyear, the proposed relaxation of credit standards will result in an expected increase in the average accounts receivable balance of

  A. $520,840

  B. $1,822,930

  C. $2,083,340

  D. $3,906,270

  Correct Answer: B

  Of the $50,000,000 of sales, 75% are expected to be on credit, a total of $37,500,000. Average daily credit sales are therefore $104167 ($37,500,000 + 360 days). If the average collection period is 20 days, the average balance in accounts receivable is $2,083,340 ($104,167 x 20 days). If credit sales increase by 25%, average daily sales will increase to $130,209 ($104,167 x 125%). For an average collection period of 30 days, the average accounts receivable balance will be $3,906,270 ($130,209 x 30 days). Hence, the expected increase in the balance is $1 ,822,930 ($3,906,270 -- $2,083 340).