D.

Briefly explain the philosophical difference between the

MULTIPLE CHOICE QUESTIONS EOQ model and the just-in-time model. Which of the
two models will likely result in lower holding costs for
1. Inventory holding costs typically include: the firm? Why?
A. clerical costs of purchase-order preparation.
B. costs of deterioration, theft, or spoilage. LO: 1, 2 Type: RC, A
C. costs associated with lost sales to customers.
D. forgone interest on money tied up in inventory. Answer:
E. items "B" And "D" above. A. The EOQ can be figured by taking the square root of: (2
x annual requirement x cost per order) ÷ annual
Answer: E LO: 1 Type: RC holding cost per unit. The square root of (2 x 4,000 x
$30) ÷ $1.50, or 160,000, is 400.
2. Inventory holding costs would typically include all of the
following except: B. The ordering cost is based on 10 orders (4,000 units ÷
A. insurance. 400 units) x $30, and totals $300; the holding cost is
B. theft. computed on Pullman’s average inventory of 200 units
C. transportation. (400 ÷ 2) and amounts to $300 (200 x $1.50). Thus,
D. obsolescence. costs at the EOQ total $600 ($300 + $300).
E. warehouse rent.
C. Pullman is currently ordering four times each year,
Answer: C LO: 1 Type: RC resulting in order costs of $120 ($30 x 4). Each order is
for 1,000 units (4,000 ÷ 4), which gives rise to an
3. At the economic order quantity: average inventory of 500 units (1,000 ÷ 2) and holding
A. total annual inventory costs, holding costs, and costs of $750 (500 x $1.50). Total costs are $870 ($120
ordering costs are all minimized. + $750), and the EOQ produces a $270 savings for the
B. total annual inventory costs and holding costs are firm ($870 - $600).
minimized.
C. total annual inventory costs are minimized, and holding D. The EOQ model assumes that some inventory is
costs equal ordering costs. necessary for business operations, and the goal is to
D. total annual inventory costs are minimized, and holding optimize the order quantity to produce a situation
costs exceed ordering costs. where ordering costs equal holding costs. In contrast,
E. total annual inventory costs are minimized, and under JIT, holding inventory in a warehouse is deemed
ordering costs exceed holding costs. to be inefficient and wasteful. Thus, inventory should
be minimized and even eliminated, if possible.
Answer: C LO: 1 Type: N
Inventory under a JIT system is typically lower and,
4. Chan uses an economic order quantity model and has thus, holding costs are lower with this approach.
determined an optimal order size of 600 units. Annual
demand is 18,000 units, ordering costs are $15 per order,
and holding costs are $1.50 per unit. Chan's annual ordering
and holding costs total:
A. $900.
B. $1,350.
C. $9,900.
D. $27,450.
E. some other amount.

Answer: A LO: 1 Type: A

Use the following to answer questions 5-6:

Cartwright Graphics uses a special purpose paper in 80% of its jobs.

The paper is purchased in 100-sheet packages at a cost of $100 per
package. Management estimates that the cost of placing and
receiving a typical order is $15, and the annual cost of carrying a
package in inventory is $1.50. Cartwright uses 2,600 packages each
year. Production is constant, and the lead time to receive an order is 1
week.

5. The economic order quantity is approximately:

A. 203 packages.
B. 225 packages.
C. 228 packages.
D. 565 packages.
E. 631 packages.

Answer: C LO: 1 Type: A

6. The reorder point is:

A. 25 packages.
B. 50 packages.
C. 100 packages.
D. 203 packages.
E. 225 packages.

Answer: B LO: 1 Type: A

7. When comparing EOQ and JIT inventory systems, which of

the following statements is false?
A. The EOQ approach takes the viewpoint that some
inventory is necessary.
B. The EOQ system assumes a constant order quantity.
C. JIT argues that inventory investments should be
minimized.
D. The EOQ system focuses on acquisition and holding
costs.
E. JIT argues that safety stocks are necessary to reduce
the probability of a stock shortage.

Answer: E LO: 2 Type: RC

S
EXERCISES

Implementation of EOQ; JIT

8. Pullman carries a part that is popular in the manufacture of

automatic sprayers. Demand for this part is 4,000 units per
year; order costs amount to $30 per order, and holding costs
total $1.50 per unit. Pullman currently places four orders per
year with its suppliers.

Management is considering the implementation of an

economic order quantity model in an effort to better manage
its inventories.

Required:
A. Compute Pullman's economic order quantity.
B. Compute total annual inventory costs if Pullman follows
the EOQ policy.
C. How much will the company save by adopting the EOQ
model?

88 Hilton, Managerial Accounting, Seventh Edition