Ramon Magsaysay Technological University

Iba, Zambales

MANAGEMENT ADVISORY SERVICES PART 2

FINAL EXAMINATION

1. The economic order quantity formula indicates that:

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

2. An example of carrying cost is:

a. Disruption of production schedules b. Quantity discount lost c. Handling costs d. Spoilage

3. The ordering costs associated with inventory management include:

a. Insurance cost, purchasing cost, shipping cost and spoilage
b. Obsolescence, set up cost, quantity discounts lost and storage costs
c. Purchasing costs, shipping costs, set up costs and quantity discount lost
d. Shipping costs, obsolescence, set up costs and capital invested

4. The amount of inventory that a company would tend to hold in stock would increase as the:
a. Sales level fails to a permanently lower level
b. Cost of carrying inventory decreases
c. Variability of sales decreases
d. Cost of running out of stock decreases

5. 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 P50;
 The stock put cost is estimated to be P5 per unit;
 The company orders inventory on the average of 10 times per year;
 The probabilities of a stock out 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%
The total cost of safety stock on an annual basis with a safety stock level of 100 units is:

a. P550 b. P1,750 c. P1,950 d. P2,000

6. A firm often factors its accounts receivable. Its finance company requires a 6% reserve and charges a 1.4% commission on the amount of
receivables. The remaining amount to be advanced is further reduced by an annual interest charge of 15%. What proceeds will the firm
receive from the finance company at the time a P100,000 account due in 60 days is factored?

a. P85,000 b. P90,285 c. P92,600 d. P96,135

7. Greece Inc. is going to begin factoring its accounts receivable and has collected information on the following four finance companies:

Required Reserves Commissions Annual Interest Charge

Company A 6% 1.4% 15%
Company B 7% 1.2% 12%
Company C 5% 1.7% 20%
Company D 8% 1.0% 5%
Which company will give Greece the highest proceeds from a P100,000 account due in 60 days?

a. Company A b. Company B c. Company C d. Company D

8. A company enters into an agreement with a firm that will factor the company’s accounts receivable. The factor agrees to buy the
company’s receivables, which average P100,000 per month and have an average collection period of 30 days. The factor will advance up to
80% of the face value of the receivables at an annual rate of 10%, and charge a fee of 2% on all receivables purchased. The controller of
the company estimated that the company would save P18,000 in collection expenses over the year. Fees and interest are not deducted in
advance. Assuming a 360-day year, what is the annual cost of financing?

a. 10% b. 12% c. 14% d. 17.5%

9. Sweden Company, a retail store, is considering foregoing sales discounts in order to delay using its cash. Supplier credit terms Sweden
Company, a retail store, is considering foregoing sales discounts in order to delay using its cash. Supplier credit terms are 2/10, n/30.
Assuming a 360-day year, what is the annual cost of credit if the cash discount is not taken and Sweden pays nare 2/10, n/30. Assuming a
360-day year, what is the annual cost of credit if the cash discount is not taken and Sweden pays net 30?
 a. 24% b. 24.5% c. 36% d. 36.7%

10. Norway Company buys on terms, 2/10. Net/30, but generally does not pay until 40 days after the invoice date. Its purchases total
P1,080,000 per year. How much non-free trade credit does the firm use each year?

a. P120,000 b. P90,000 c. P60,000 d. P30,000

11. Finland Corporation intends to acquire new equipment costing P2,400,000. A bank loan can finance the acquisition with a 10% discounted
interest. Alternatively, the company may just delay payment to its suppliers. Presently, the company buys under terms of 2/10, net 40, but
management believes payment could be delayed 30 additional days, without penalty, that is, payment could be made 70 days. What
should the company do?
a. Borrow, since it is cheaper by 1.13% than delaying payment to suppliers
b. Borrow, since it is cheaper by 2.5% than delaying payment to suppliers
c. Delaying payments to suppliers since it would cost 12% as against bank loan of 10%
d. Delay payments to suppliers since it does not cost anything

12. Romania Company’s bank requires a compensating balance of 20% on a P100,000 loan. If the stated interest on the loan is 7%, what is the
effective cost of the loan?

a. 5.83% b. 7% c. 8.4% d. 8.75%

13. Belgium Company got a recent quote on a commercial bank loan of 16% discounted rate with a 20% compensating balance. The term of
the loan is one year. The effective cost of borrowing is:

a. 19.05% b. 20% c. 22.85% d. 25%

14. A bank loans P1,000,000 to Ireland Industries for 180 days with interest of P60,000 to be paid. The bank also requires a P200,000
compensating balance for the loan period. What is the effective annual rate?

a. 16.22% b. 15% c. 14% d. 13%

15. Assume that a bank has lent a firm a P200,000 for 60 days at 10% interest. The loan is discounted and the bank requires a 20%
compensating balance. What is the effective annual rate?

a. 14.60% b. 12.76% c. 10.17% d. 10%

16. The Brunei Cou-peet Bank and Lugina Corp. signed a loan agreement subject to the following terms:
 The stated interest rate of 18% on one-year discounted loan;
 15% compensating non-interest bearing checking account balance to be maintained by Lugina Corp. with Brunei Cou-peet
Bank.
The net proceeds of the loan totalled P1,000,000. The principal amount of the loan was:

a. P1,492,537 b. P1,219,512 c. P1,176,471 d. P1,000,000

17. Chile Co. obtained a short term bank loan for P250,000 at an annual interest of 6%. As a condition of the loan, the company is required to
maintain a compensating balance of P50,000 in its savings account that earns interest at an annual rate of 2%. The company would
otherwise maintain only P25,000 in the savings account for the transaction purposes. What is the effective interest rate of the loan?

a. 5.80% b. 6.44% c. 6.66% d. 7%

18. A company has accounts payable of P5 million with terms 2% discount within 15 days, net 30 days. It can borrow funds from a bank at an
annual rate of 12% or it can wait until the 30th day when it will receive revenues to cover the payment. If it borrows funds on the last day of
the discount period in order to obtain the discount, its total cost would be:

a. P24,500 more b. P51,000 less c. P75,500 less d. P100,000 less

19. Brazil Co. can issue 3-month commercial paper with a face value of P1,000,000 for P980,000. The transaction costs would be P1,200. The
annualized percentage cost of financing would be:

a. 2.17% b. 8% c. 8.48% d. 8.66%

20. The following information pertains to Material X which is used by Sage Co.:

Annual usage in units 20,000 Safety stock in units 800

Working days per year 250 Normal lead time in working days 30
Units of material X will be required evenly throughout the year. The order point is:

a. 800 b. 1,600 c. 2,400 d. 3,200

21. Ral Co. sells 20,000 radios evenly throughout the year. The cost of carrying one unit in inventory for one year is P8, and the cost per order
is P32. What is the economic order quantity?

a. 625 b. 400 c. 283 d. 200

22. As a consequence of finding a more dependable supplier, Dee Co. reduced its safety stock of raw materials by 80%. What is the effect of
this safety stock reduction in Dee’s economic order quantity?

a. 80% decrease b. 64% decrease c. 20% increase d. No effect

23. The economic order quantity formula assumes that:

a. Periodic demand for the good is known
b. Carrying cost per unit vary with quantity ordered
c. Cost of placing an order vary with quantity ordered
d. Purchase costs per unit differ due to quantity discount

24. Each stockout of the product sold by A.W. Inn Co. costs P1,750 per occurrence. The carrying cost per unit of inventory is P5 per year and
the company orders 1,500 units of product 24 times a year at a cost of P100 per order. The probability of a stockout at various levels of
safety stock is:

Units of safety stock Probability of stockout Units of safety stock Probability of stockout
0 50% 300 5%
100 30% 400 1%
200 14%
The optimal safety stock level for the company is:

a. 0 units b. 100 units c. 300 units d. 400 units

25. Thinking Co. sells 200 units of discs per week. Purchase order lead time is 3 weeks and the economic order quantity is 450 units. What is
the reorder point?

a. 425 units b. 1,750 units c. 600 units d. 2,250 units

26. China Sea Store sells, 100,000 tea bags a year. Additional data are presented below:

Selling price per bag P2.50 Carrying cost 20% of unit cost
Purchase cost per bag P1.50 No. of days the company operates in a year 250
Ordering cost P5.40 per order Average lead time on purchases 6 days
What is the reorder point if the company will keep a safety stock of inventory:

a. 2,400 bags b. 5,400 bags c. 6,400 bags d. 8,800 bags

27. M&L Company had the following information on inventory:

Sales 20,000 units per year Safety stock 2,600 units

Order quantity 4,000 units Lead time 4 weeks
What is the re-order point (for calculation purposes, use 50-week year):

a. 4,200 units b. 5,600 units c. 2,600 units d. 1,600 units

28. Discs Unlimited sells 200 discs per week. Purchase order lead time averages three weeks. Based on the most updated calculation, the
economic order quantity is:

a. 600 discs b. 425 discs c. 1,750 discs d. 2,250 discs

29. Huron Corporation purchases 60,000 headbands per year. The average purchase lead time is 20 working days, safety stock equals 7 days
normal usage and the corporation works 240 days per year. Huron should reorder headbands when the quantity in inventory reaches:

a. 5,000 units b. 6,750 units c. 1,750 units d. 5,250 units

30. Scholas Co. uses 840,000 units of component R4 in manufacturing P444 over a 300-day work year. The usual lead time for the part is 6
days, however at times, the lead time has gone high as 8 days. Scholas now desires to adjust its safety stock policy. The increase in safety
stock size is:

a. 6,800 units b. 2,800 units c. 7,200 units d. 5,600 units

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