8 Inventory Management

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Question 1 - CMA 1294 1.21 - Inventory Management
An example of a carrying cost is
A. Handling costs.
B. Spoilage.
C. Quantity discounts lost.
D. Disruption of production schedules.
Question 2 - ICMA 10.P2.170 - Inventory Management
Moss Products uses the Economic Order Quantity (EOQ) model as part of its inventory management process. A
decrease in which one of the following variables would increase the EOQ?
A. Safety stock level.

B. Cost per order.
C. Carrying costs.
D. Annual sales.
James Smith is the new manager of inventory at American Electronics, a major retailer. He is developing an inventory
control system, and knows he should consider establishing a safety stock level. The safety stock can protect against
all of the following risks, except for the possibility that
A. customers cannot find the merchandise they want, and they will go to the competition.
B. new competition may open in the company's market area.
C. shipments of merchandise from the manufacturers is delayed by as much as one week.
D. the distribution of daily sales will have a large variance, due to holidays, weather, advertising, and weekly shopping
habits.
Question 4 - CIA 593 IV.53 - Inventory Management
A company serves as a distributor of products by ordering finished products once a quarter and using that inventory to
accommodate the demand over the quarter. If it plans to ease its credit policy for customers, the amount of products
ordered for its inventory every quarter will be
A. Reduced to offset the increased cost of carrying accounts receivable.

B. Unaffected if safety stock is part of the current quarterly order.
C. Increased to accommodate higher sales levels.
D. Unaffected if the JIT inventory control system is used.
The amount of inventory that a company would tend to hold in safety stock would increase as the
A. Cost of running out of stock decreases.
(c) HOCK international, page 1

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A. Cost of running out of stock decreases.

B. Variability of sales decreases.
C. Sales level falls to a permanently lower level.
D. Cost of carrying inventory decreases.
Carnes Industries uses the Economic Order Quantity (EOQ) model as part of its inventory control program. An
increase in which one of the following variables would increase the EOQ?
A. Purchase price per unit.

B. Ordering costs.
C. Carrying cost rate.
D. Safety stock level.
Paint Corporation expects to use 48,000 gallons of paint per year costing $12 per gallon. Inventory carrying cost is
equal to 20% of the purchase price. The company uses its inventory at a constant rate. The lead time for placing the
order is 3 days, and Paint Corporation holds 2,400 gallons of paint as safety stock. If the company orders 2,000 gallons
of paint per order, what is the cost of carrying inventory?
A. $2,400
B. $8,160
C. $5,280
D. $5,760
Which one of the following items is not directly reflected in the basic economic order quantity (EOQ) model?
A. Public warehouse rental charges.

B. Interest on invested capital.
C. Inventory obsolescence.
D. Quantity discounts lost on inventory purchases.
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. 125 units.
C. 100 units.
D. 150 units.

All of the following are carrying costs of inventory except

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All of the following are carrying costs of inventory except
A. shipping costs.
B. opportunity costs.
C. insurance.
D. storage costs.
The optimal level of inventory is affected by all of the following except the
A. Cost per unit of inventory.

B. Usage rate of inventory per time period.
C. Cost of placing an order for merchandise.
D. Current level of inventory.
Question 12 - CMA Sample Q1.8 - Inventory Management
A major supplier has offered Alpha Corporation a year-end special purchase whereby Alpha could purchase 180,000
cases of sport drink at $10 per case. Alpha normally orders 30,000 cases per month at $12 per case. Alpha's cost of
capital is 9%. In calculating the overall opportunity cost of this offer, the cost of carrying the increased inventory would
be
A. $81,000
B. $64,800
C. $32,400
D. $40,500
Which one of the following is not explicitly considered in the standard calculation of Economic Order Quantity (EOQ)?
A. Ordering costs.
B. Quantity discounts.
C. Carrying costs.
D. Level of sales.
Handy operates a chain of hardware stores across Ohio. 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 $50. The stockout cost is
estimated to be $5 per unit. The company orders inventory on the average of 10 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: (c) HOCK international, page 3
Safety stock Stockout Probability
200 0 0%
100 100 15%
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estimated to be $5 per unit. The company orders inventory on the average of 10 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:
Safety stock Stockout Probability
200 0 0%
100 100 15%
0 100 15%
0 200 12%
The total cost of safety stock on an annual basis with a safety stock level of 100 units is:
A. $1,750
B. $550
C. $1,950
D. $2,000
Which one of the following statements concerning the economic order quantity (EOQ) is correct?
A. The EOQ results in the minimum ordering cost and minimum carrying cost.
B. Increasing the EOQ is the best way to avoid stockouts.
C. The EOQ model assumes that order delivery times are consistent.
D. The EOQ model assumes constantly increasing usage over the year.
The level of safety stock in inventory management depends on all of the following except the:
A. Level of customer dissatisfaction for back orders.

B. Cost to reorder stock.
C. Cost of running out of inventory.
D. Level of uncertainty of the sales forecast.
Moore Company's budgeted sales and budgeted cost of sales for the coming year are $54,000,000 and $36,000,000,
respectively. Moore has made changes in its inventory system that will increase turnover from its current level of nine
times per year to 12 times per year. If short-term interest rates average 8%, Moore's cost savings in the coming year
will be
A. $120,000.
B. $40,000.
C. $20,000.
D. $80,000.

(c) HOCK
All of the following are inventory carrying costs except international, page 4
A. Inspections of received inventory.

B. Insurance.
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All of the following are inventory carrying costs except
A. Inspections of received inventory.

B. Insurance.
C. Storage.
D. Opportunity cost of inventory investment.
Valley Inc. uses 400 lbs. of a rare isotope per year. The isotope costs $500 per lb., but the supplier is offering a
quantity discount of 2% for order sizes between 30 and 79 lbs., and a 6% discount for order sizes of 80 lbs. or more.
The ordering costs are $200. Carrying costs are $100 per year per lb. of material and are not affected by the discounts.
If the purchasing manager places eight orders of 50 lbs. each, the total cost of ordering and carrying inventory,
including discounts lost, will be
A. $1,600.
B. $12,100.
C. $4,100.
D. $6,600.
Which one of the following would not be considered a carrying cost associated with inventory?
A. Cost of obsolescence.
B. Insurance costs.
C. Cost of capital invested in the inventory.
D. Shipping costs.
The amount of inventory that a company would tend to hold in stock would increase as the
A. Variability of sales decreases.

B. Cost of carrying inventory decreases.
C. Sales level falls to a permanently lower level.
D. Cost of running out of stock decreases.
When the Economic Order Quantity (EOQ) model is used for a firm that manufactures its inventory, ordering costs
consist primarily of
A. Obsolescence and deterioration.

B. Production set-up.
C. Insurance and taxes.
D. Storage and handling. (c) HOCK international, page 5
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B. Production set-up.
C. Insurance and taxes.
D. Storage and handling.
If a company implements a just-in-time inventory management program, it would expect that its inventory turnover ratio
will
A. increase, and its days' sales in inventory will increase.

B. increase, and its days' sales in inventory will decrease.
C. decrease, and its days' sales in inventory will decrease.
D. decrease, and its days' sales in inventory will increase.
The result of the economic order quantity formula indicates the
A. Annual quantity of inventory to be carried.

B. Safety stock plus estimated inventory for the year.
C. Annual usage of materials during the year.
D. Quantity of each individual order during the year.
Question 25 - ICMA 10.P2.164-ADAPTED - Inventory Management
A review of the inventories of Cedar Grove Company shows the following cost data for entertainment centers.
Invoice price $380.00per unit
Freight and insurance on shipment 20.00per unit
Insurance on inventory 15.00per unit
Unloading 140.00per order
Cost of placing orders 10.00per order
Cost of capital 9%per annum
On average, an entertainment center remains in inventory for one month before it is sold. What are the total carrying
costs of inventory for an entertainment center?
A. $49.20.
B. $18.00.
C. $400.00.
D. $17.85.
A. This is a cost of receiving inventory, and therefore is a cost of ordering inventory.
B. Spoilage is an example of the costs incurred from carrying inventory. If the company held no inventory,
there would be no costs for spoilage.
(c) HOCK
C. Purchasing costs can be affected by discounts international,
for size page
of purchases, and6 a quantity discount lost can increase
purchasing costs. It is not an inventory carrying cost.
D. Disruptions in the production schedule is a cost of a stockout. This is in essence the opposite of the cost of carrying
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A. This is a cost of receiving inventory, and therefore is a cost of ordering inventory.
B. Spoilage is an example of the costs incurred from carrying inventory. If the company held no inventory,
there would be no costs for spoilage.
C. Purchasing costs can be affected by discounts for size of purchases, and a quantity discount lost can increase
purchasing costs. It is not an inventory carrying cost.
D. Disruptions in the production schedule is a cost of a stockout. This is in essence the opposite of the cost of carrying
inventory.
A. The safety stock level is not a part of the Economic Order Quantity model. Thus a change in the safety stock level
will have no effect on the economic order quantity.
B.
If the factors in the numerator (the cost of placing an order and the periodic demand) increase, it will cause the EOQ to
increase and vice versa. If the factor in the denominator (the carrying cost per unit per period) increases, it will cause
the EOQ to decrease, and vice versa.
The cost per order is in the numerator and thus a decrease in the cost per order will result in an decrease in the
economic order quantity, not an increase.
C.
If the factors in the numerator (the cost of placing an order and the periodic demand) increase, it will cause
the EOQ to increase and vice versa. If the factor in the denominator (the carrying cost per unit per period)
increases, it will cause the EOQ to decrease, and vice versa.
The carrying cost per unit is in the denominator and thus a decrease in the carrying cost will result in an
increase in the economic order quantity.
D.
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The carrying cost per unit is in the denominator and thus a decrease in the carrying cost will result in an
increase in the economic order quantity.
D.
If the factors in the numerator (the cost of placing an order and the periodic demand, or annual sales) increase, it will
cause the EOQ to increase and vice versa. If the factor in the denominator (the carrying cost per unit per period)
The periodic demand, or annual sales, is in the numerator and thus an decrease in the periodic demand will result in a
decrease in the economic orderquantity, not an increase.
A. Safety stock is a protection against stockouts which could cause lost sales. If customers cannot find the
merchandise they want, they will go to the competition. Thus having safety stock can protect a company against the
risk of customers not being able to find the merchandise they want and going to the competition.
B. Safety stock is a protection against stockouts which could cause lost sales. Having safety stock cannot
protect a company against the risk that new competition may open in the company's market area.
C. Safety stock is a protection against stockouts which could cause lost sales. A stockout could be caused by
shipments of merchandise from the manufacturer being delayed. So having safety stock can protect a company
against the risk of shipments of merchandise from the manufacturer being delayed.
D. Safety stock is a protection against stockouts which could cause lost sales. A stockout could be caused by a large
variance in the distribution of daily sales, i.e., heavy sales of one product and virtually no sales of other products. So
having safety stock can protect a company against the distribution of daily sales will have a large variance, due to
holidays, weather, advertising, and weekly shopping habits.
Question 4 - CIA 593 IV.53 - Inventory Management
A. The change in the credit terms will lead to an increase in the level of sales of the company. Therefore, they will need
to carry more inventory, not less.
B. The change in the credit terms will lead to an increase in the level of sales of the company. Therefore, they will need
to carry more inventory.
C. If the company eases its credit policy, it will be giving credit to more customers and its sales will increase.
Therefore, the company will need to increase the level of inventory on hand in order to meet the increased
demand. (c) HOCK international, page 8
D. Whether a JIT system is used or not, the company will need to carry more inventory to meet the increased level of
sales that will result from the change in the credit terms.
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Therefore, the company will need to increase the level of inventory on hand in order to meet the increased
demand.
D. Whether a JIT system is used or not, the company will need to carry more inventory to meet the increased level of
sales that will result from the change in the credit terms.
A. If the cost of running out of stock (a stockout) decreases, the company will hold less safety stock because the cost
of running out is now lower. This is because the company needs to balance the cost of holding inventory with the cost
of a stockout in order to determine the level of safety stock. If the cost of a stockout decreases, they will be able to hold
less inventory since the cost of s tockout is now smaller.
B. If the variability of sales decreases, the company will be able to hold a lower level of safety stock because they are
better able to predict the inventory needs while they wait for an order to be filled.
C. If the level of sales falls permanently, the company will be able to reduce their level of safety stock.
D. If the cost of holding decreases the company will probably increase their level of safety stock. This is
because the company needs to balance the cost of holding inventory with the cost of a stockout in order to
determine the level of safety stock. If the cost of holding inventory decreases, they will be able to hold more
inventory to avoid the cost of a stockout.
A. The purchase price per unit is not a factor in the Economic Order Quantity model. Thus, a change in the purchase
price per unit will not affect the economic order quantity.
B.
If the factors in the numerator (the cost of placing an order and the periodic demand) increase, it will cause
the EOQ to increase and vice versa. If the factor in the denominator (the carrying cost per unit per period)
Ordering costs is in the numerator and thus an increase in ordering costs will result in an increase in the
economic order quantity. That is because it will become more economical to place fewer orders that are each
larger in order to save on ordering costs.

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C.
If the factors in the numerator (the cost of placing an order and the periodic demand) increase, it will cause the EOQ to
increase and vice versa. If the factor in the denominator (the carrying cost per unit per period) increases, it will cause
the EOQ to decrease, and vice versa.The carrying cost rate is in the denominator and thus an increase in the carrying
cost rate will result in a decrease in the economic order quantity, not an increase.
D. The safety stock level is not a factor in the Economic Order Quantity model. Thus, a change in the safety stock level
will not affect the economic order quantity.
A. This answer does not include the safety stock in the calculation of the inventory carrying cost.
B.
The safety stock is 2,400 gallons, so that is the level below which inventory will never fall. The company
orders 2,000 gallons of paint at a time. Therefore, the average level of inventory above the safety stock level is
1/2 of 2,000, or 1,000 gallons. Thus, the average total amount of inventory on hand at any one time is 1,000 +
2,400, or 3,400 gallons. The inventory carrying charge is 20% of cost. The cost of the inventory on hand is
3,400 × $12, or $40,800. 20% of $40,800 is $8,160.
C. This answer results from adding the safety stock and the order quantity of 2,000 and dividing the sum by 2 to
average it. However, the amount of the safety stock is constant, so that amount is already an average over time.
D. This answer includes only the safety stock in the calculation of the inventory carrying costs.
A. Public warehouse rental charges (for storing inventory) are reflected in the basic EOQ model. They are a part of the
carrying cost (part of k in the EOQ model).
B. The opportunity cost of capital, which is interest lost on money invested in inventory (that could be otherwise
invested for a return), is reflected in the basic EOQ model. It is a part of the carrying cost (part of k in the EOQ model).
C. Inventory obsolescence is reflected in the basic EOQ model. It is a carrying cost (part of k in the EOQ model).
D.
The EOQ model is the order quantity that balances ordering costs and carrying costs to determine the optimal
number of units that a company should order of a given product each time it orders that item.
The EOQ formula includes annual demand, ordering costs and carrying costs. Carrying costs include storing
the inventory, insuring and securing the inventory, inventory taxes, depreciation or rent of facilities,
(c) HOCKcost
obsolescence and spoilage, and the opportunity international, page 10
of the inventory investment. Ordering costs include the
costs of placing an order (obtaining purchase approvals, preparing and issuing purchase orders), the cost of
receiving an order, matching invoices received with purchase ordeers and receiving reports, and any other
special processing associated with ordering.
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The EOQ formula includes annual demand, ordering costs and carrying costs. Carrying costs include storing
the inventory, insuring and securing the inventory, inventory taxes, depreciation or rent of facilities,
obsolescence and spoilage, and the opportunity cost of the inventory investment. Ordering costs include the
costs of placing an order (obtaining purchase approvals, preparing and issuing purchase orders), the cost of
receiving an order, matching invoices received with purchase ordeers and receiving reports, and any other
special processing associated with ordering.
Quantity discounts lost on inventory purchases are part of purchasing costs. The purchasing cost of
inventory includes the cost of the inventory itself plus landing costs, or incoming freight costs. Purchasing
costs can be affected by discounts for size of purchases, by missed discounts for not ordering enough to
qualify for the discount, and by suppliers’ credit terms, such as discounts for early payment. However,
purchasing costs are not included in the EOQ model.
A. This is the maximum level of inventory that will be held after a shipment is received. See the correct answer for a
complete explanation.
B. This answer assumes that the EOQ is 250 units and that the company holds no safety stock. See the correct
answer for a complete explanation.
C. This answer does not take into account the safety stock. See the correct answer for a complete explanation.
D. Given that Edwards maintains a 50 unit safety stock, every time the next shipment of inventory is received,
there are 50 units in hand. This means that the lowest level of inventory is 50 units. As soon as the order of
inventory is received, the level of inventory increases to 250 units, so this is the highest level of inventory.
Adding these two amounts together and dividing by 2 will give us the average inventory level: (50 + 250) ÷ 2 =
150 units.
A.
The carrying costs of inventory include storing the inventory, insuring and securing it, paying inventory taxes
on it, the depreciation or rent on inventory storage facilities, obsolescence and spoilage of inventory, and the
opportunity cost of the inventory investment, or the lost interest for investing cash in inventory instead of in
some other longer-term investment that would return dividends or interest.
The way shipping costs are classified depends on whether they are incoming shipping costs (shipping costs
to receive the inventory from the supplier) or outgoing shipping costs (shipping costs to send the product to
the customers who have purchased it). Incoming shipping costs are product costs and they are included in
inventory along with the cost of the items. Outgoing shipping costs are selling costs and are period costs. But
neither incoming nor outgoing shipping costs are classified as inventory carrying costs.
B. Opportunity costs are inventory carrying costs. The opportunity cost of inventory is the cost of capital, or lost interest,
for investing cash in inventory instead of in some other longer-term investment that would return dividends or interest.
C. Insurance is a carrying cost of inventory.
D. Storage costs are carrying costs of inventory.

A. The cost per unit of inventory will directly impact the level of inventory that should be held. If the inventory is cheap,
there is less opportunity cost from holding the inventory.
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A. The cost per unit of inventory will directly impact the level of inventory that should be held. If the inventory is cheap,
there is less opportunity cost from holding the inventory.
B. The rate of usage of inventory will directly impact the level of inventory that should be held.
C. The cost of placing an order for inventory will impact the optimal level of inventory to hold. If it is expensive to place
an order, the company will make fewer orders, but for more units each time. This will increase the level of inventory
that they will hold in order to minimize all costs associated with inventory.
D. The current level of inventory held by the company does not influence what the optimal level of inventory
should be.
Question 12 - CMA Sample Q1.8 - Inventory Management
A.
This is $1,800,000, the total spent for a six-month supply, divided by 2 and the result multiplied by 0.09. $1,800,000
divided by 2 is the average inventory level for the six month period. However, what is important is the amount by which
average inventory would increase as a result of the 6-month purchase, i.e., the incremental increase in inventory.
Furthermore, multiplying by 0.09 results in the cost of capital for a full year, whereas the time period for this purchase is
only 6 months, or one-half of a year.
B. This is the interest cost for 12 months, not six months as this question requires. Since Alpha normally orders 30,000
cases per month and the supplieer has offered the company the opportunity of purchasing 180,000 cases, the 180,000
cases is a 6-month supply (180,000 ÷ 30,000).
C.
Normally Alpha orders 30,000 cases per month for $12 a case, or a total of $360,000 per month. If they buy this
at the beginning of the month and then use it down to zero by month end, the average inventory level
outstanding during the month is ($360,000 + $0) ÷ 2, which is $180,000 per month.
Since Alpha normally orders 30,000 cases per month, 180,000 cases would be a 6-month supply (180,000 ÷
30,000 = 6).
If they make this new purchase, they would spend a total of $1,800,000 for a 6-month supply, and their average
inventory during this six months would be $900,000: ($1,800,000 + $0) ÷ 2. Under this new plan, the average
inventory will be $720,000 higher than under the old plan ($900,000 − $180,000). This is money that would not
be able to be used for other purposes. So, the cost of tying this money up in inventory for 6 months is
($720,000 × 9%) ÷ 2, or $32,400. (We divide by 2 since the 9% is an annual rate, and we are looking at only a
6-month period.)
D. This is the cost of capital to carry the inventory under the new plan, not the cost of the incremental inventory that is
held under the new plan compared to the old plan, i.e., the amount of increase in average inventory. See the correct
A.
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A.
Ordering costs are explicitly incorporated into the EOQ model.
B.
Quantity discounts are not included in the calculation of the Economic Order Quantity (EOQ).
C.
Carrying costs are explicitly incorporated into the EOQ model.
D.

The demand for the inventory is explicitly incorporated into the EOQ model.
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The demand for the inventory is explicitly incorporated into the EOQ model.
A.
The total cost of the safety stock is the carrying cost plus the expected stockout cost.
If the company carries 100 units of safety stock, the cost of carrying the safety stock will be $1,000 for the
year. This is calculated as 20% of the value of the safety stock. The average inventory investment per unit is
$50. For 100 units, the carrying cost is $50 × 100 × 0.20, or $1,000.
The stockout cost is $5 per unit. At a safety stock level of 100 units, if a stockout occurs, the number of units
the company would be short would be 100 units (from the "Stockout" column). Therefore, the cost of one
stockout would be 100 × $5, or $500.
The company orders inventory an average of 10 times per year. The probability of a stockout occurring at a
safety stock level of 100 units is 15%. Therefore, during a year's time, the expected number of stockouts is 10
× 0.15, or 1.5 times. At a cost of $500 per stockout, this is an expected annual cost of $750 ($500 × 1.5).
Since the total cost of the safety stock is the carrying cost plus the expected stockout cost, the total cost of
the safety stock on an annual basis with a safety stock level of 100 units is $1,000 carrying costs plus $750
stockout costs, or $1,750.
B.
This is not the correct answer. Please see the correct answer for a complete explanation.
We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please let
us know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us an
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C.
D. This answer can result from totaling the amounts in the "Stockout" column and multiplying the total by the stockout
(c) HOCK
cost of $5 per unit. The amount of the stockout to useinternational, pageat14
is only the amount the level of the number of units of safety
stock held. Furthermore, this answer does not take into consideration the carrying cost of the safety stock.
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D. This answer can result from totaling the amounts in the "Stockout" column and multiplying the total by the stockout
cost of $5 per unit. The amount of the stockout to use is only the amount at the level of the number of units of safety
stock held. Furthermore, this answer does not take into consideration the carrying cost of the safety stock.
A. The Economic Order Quantity model does not result in the minimum ordering cost and the minimum carrying cost
as separate items. However, it does minimize the total cost of ordering and holding inventory.
B. The best way to avoid stockouts is to maintain an appropriate level of safety stock.
C. One of the assumptions of the EOQ model is that the required lead time to receive an order is known and is
consistent.
D. One of the assumptions of the EOQ model is that the demand for the inventory item is known and is constant (not
steadily increasing).
A. The greater the dissatisfaction that customers have in the case of a stockout, the more safety stock that the
company must hold. See the correct answer for a complete explanation.
B. The amount of safety stock that a company is required to hold will be affected by: 1) the variability of the
lead time, 2) the variability of the demand for the product, and 3) the cost of stockout. The more variable either
of the first two items are, the more safety stock the company will need to carry to guard against stockouts in
the case of an unusually high demand or an unusually long lead time. If these items are more consistent and
predictable, the company can reduce the amount of its safety stock because there is a smaller chance of
needing so many items in stock. The greater the cost of a stockout, the more safety stock the company will
need to keep because the potential loss from a stockout is higher.
C. The greater the cost of running out of inventory, the more safety stock that the company must hold. See the correct
D. The more uncertain the sales forecast, the more safety stock the company will need to keep. Therefore, the level of
uncertainty of the future sales does impact the level of safety stock. See the correct answer for a complete explanation.
A. This answer is incorrect because it bases the calculation on the sales amount, not the cost of goods sold figure. See
the correct answer for a complete explanation.
B.
C. (c) HOCK international, page 15
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C.
D. By increasing the number of times the inventory is turned over each year, Moore will decrease the amount
of inventory that is being held at any one point in time. Currently, with inventory being turned over 9 times a
year, the average inventory balance is $4,000,000 ($36 million ÷ 9). If the inventory turnover is increased to 12
times, the average inventory will be $3,000,000. The extra million dollars that would not be invested in
inventory would be available for other uses and with an 8% interest rate, will provide Moore with a cost
savings of $80,000 by not having $1 million tied up in inventory.
A. The costs of inspecting inventory that is received is not a cost that increases as the time that the inventory
is held increases. Rather, it is the cost of receiving inventory and therefore is better included as a cost of
ordering inventory.
B. Insurance is an example of the costs of carrying inventory.
C. Storage is an example of the costs of carrying inventory.
D. The opportunity cost of the investment in inventory is an example of the costs of carrying inventory.
A. This is the ordering cost only. The total cost of ordering and carrying the inventory, including discounts lost, will
include the lost discount (from ordering at the 2% discount level instead of at the 6% discount level), ordering costs and
carrying costs.
B.
The total cost will include the lost discount (from ordering at the 2% discount level instead of at the 6%
discount level), ordering costs and carrying costs.
Lost discount cost: The company purchases 400 pounds at $500 per pound per year, at a total cost of
$200,000 (400 × $500). The cost of the lost discounts is the difference between 6% and 2% of $200,000, i.e., 4%
multiplied by $200,000. $200,000 × 0.04 = $8,000.
Ordering cost: $200 per order × 8 orders per year = $1,600.
Carrying cost: Each order consists of 50 pounds. It is assumed Valley Inc. will use those 50 pounds down to
zero and then receive another order of 50. We must also assume they will use the amount in each order at a
steady rate. Therefore, the average number of pounds in inventory throughout the year will be the average of
50 and 0, which is (50 + 0) / 2, or 25 pounds. The carrying cost of $100 per pound is multiplied by these 25
pounds, and the cost is $2,500.
The total cost will be $8,000 + $1,600 + $2,500 = $12,100.
C. This is the inventory ordering and carrying costs, but it does not include discounts lost. The total cost of ordering and
carrying the inventory, including discounts lost, will include the lost discount (from ordering at the 2% discount level
Part 2 : 01/14/19 11:28:32
pounds, and the cost is $2,500.
The total cost will be $8,000 + $1,600 + $2,500 = $12,100.
C. This is the inventory ordering and carrying costs, but it does not include discounts lost. The total cost of ordering and
carrying the inventory, including discounts lost, will include the lost discount (from ordering at the 2% discount level
instead of at the 6% discount level), ordering costs and carrying costs.
D.
This is the inventory ordering costs plus carrying costs, but the carrying costs are calculated incorrectly. They are
calculated using the number of units ordered each time an order is placed. Furthermore, this answer does not include
discounts lost.
The inventory carrying costs should be calculated using the average number of units in inventory throughout the year,
not the amount ordered each time an order is placed.
A. This is a cost of carrying inventory.
B. This is a cost of carrying inventory.
C. This is a cost of carrying inventory.
D. Incoming shipping costs are part of "ordering costs" and are included in the inventoriable cost of the
inventory. Outgoing shipping costs are a selling cost. Neither one is a carrying cost.
A. As the variability of sales decreases, the company will be able to hold lower levels of inventory because there is less
chance of a large demand that the company needs to be prepared for.
B. If the cost of holding inventory decreases, the company will be more likely to hold larger levels of
inventory. This is because there is a lower cost to hold the inventory, and by having more inventory there is
less risk of a stockout.
C. If sales fall permanently, the company should hold less inventory. See the correct answer for a complete explanation.
D. If the cost of running out of inventory decreases the company will hold less inventory because of the lower cost of
not having inventory.
A. Obsolescence and deterioration are classified as carrying costs.
B. Production set-up is the equivalent of an ordering cost for a manufacturer. This question is talking about
Economic Lot Size, which is used by manufacturers to determine how many units they should manufacture in
each production run in order to balance their setup costs with the cost of storing their completed inventory.
The goal is to minimize both the setup costs and the cost of storing completed inventory while still meeting
demand. The calculation of the Economic Lot Size is based on the same equation as is used for Economic
Order Quantity, except it uses the setup(c) HOCK
cost international,
to manufacture page 17
a batch of the product instead of the cost to
place an order.
C. Insurance and taxes are classified as carrying costs.

Part 2 : 01/14/19 11:28:32
The goal is to minimize both the setup costs and the cost of storing completed inventory while still meeting
demand. The calculation of the Economic Lot Size is based on the same equation as is used for Economic
Order Quantity, except it uses the setup cost to manufacture a batch of the product instead of the cost to
place an order.
C. Insurance and taxes are classified as carrying costs.
D. Handling—receiving orders and inspecting items received—is classified as an ordering cost, but storage is classified
as a carrying cost.
A. When the inventory turnover ratio increases, the days' sales in inventory must decrease, and vice versa. Therefore,
the inventory turnover ratio and the days' sales in inventory cannot both increase.
B.
The inventory turnover ratio is the company's annualized cost of sales divided by its average annual
inventory. If the company implements a just-in-time inventory management program, its average inventory
levels should decline. A decrease in the denominator of a ratio will cause an increase in the ratio, so the
inventory turnover ratio should be expected to increase as a result of implementing JIT inventory
management.
The days' sales in inventory is 365 divided by the inventory turnover ratio. If the inventory turnover ratio
increases as a result of implementing JIT inventory management, the denominator of the calculation will
increase and the resulting days' sales in inventory will decrease because 365 is being divided by a larger
amount.
C. When the inventory turnover ratio decreases, the days' sales in inventory must increase, and vice versa. Therefore,
the inventory turnover ratio and the days' sales in inventory cannot both decrease.
D.
The inventory turnover ratio is the company's annualized cost of sales divided by its average annual inventory. If the
company implements a just-in-time inventory management program, its average inventory levels should decline. A
decrease in the denominator of a ratio will cause an increase in the ratio, not a decrease.
The days' sales in inventory is 365 divided by the inventory turnover ratio. If the inventory turnover ratio increases as a
result of implementing JIT inventory management, the denominator of the calculation will increase and the resulting
days' sales in inventory will decrease, not increase, because 365 is being divided by a larger amount.
A. The annual quantity of inventory to be carried during the period is used in the EOQ formula, but it is not the result of
the EOQ formula.
B. The EOQ formula does not take into account the safety stock that is kept on hand.
C. The annual usage of inventory during the period is used in the EOQ formula, but it is not the result of the EOQ
formula.
D. By definition, the EOQ model calculates how many units of inventory should be ordered each time an order
is placed. The quantity is the quantity that will minimize the costs of carrying inventory and the cost of a
stockout.
Part 2 : 01/14/19 11:28:32
is placed. The quantity is the quantity that will minimize the costs of carrying inventory and the cost of a
stockout.
Question 25 - ICMA 10.P2.164-ADAPTED - Inventory Management
A. This answer results from two mistakes: (1) The cost of capital is calculated on the cost of the entertainment center
only. The freight and insurance on the shipment need to be included along with the invoice price in calculating the cost
of capital, because they are "landing costs" and are inventoriable costs the same as the cost of the inventory is. So the
cost of the inventory is the $380 invoice price plus $20 for freight and insurance on the shipment, which equals an
inventory cost of $400 per unit. That is the amount that should be used to calculate the cost of capital to carry the
inventory. (2) The cost of capital is calculated as if one entertainment center were held for one full year before selling it.
The problem says that on average, an entertainment center remains in inventory for one month before it is sold. The
cost of capital to hold it for one month is only 1/12 the cost of capital to hold it for one year.
B.
The freight and insurance on the shipment need to be included along with the invoice price in calculating the
cost of capital, because they are "landing costs" and are inventoriable costs the same as the cost of the
inventory is. So the cost of the inventory is the $380 invoice price plus $20 for freight and insurance on the
shipment, which equals an inventory cost of $400 per unit.
The cost of capital is given as 9% per year. So if an entertainment center is held for one month on average, the
cost of capital to finance it is $400 × 0.09 ÷ 12, which equals $3.00, and that is an inventory carrying cost.
Insurance on the inventory while it is in stock is $15, and that is another inventory carrying cost. The other
costs are not inventory carrying costs.
Therefore, the total carrying costs of inventory for one entertainment center are the $3.00 cost of capital +
$15.00 insurance on the unit while it is in inventory, or $18.00.
C. This is the total of the invoice price and the freight and insurance on shipment for one entertainment center. These
are not inventory carrying costs. Please see the correct answer for a complete explanation.
D. This answer results from failing to include the freight and insurance on shipment as an inventoriable cost in
calculating the cost of capital to hold an entertainment center for one month. The freight and insurance on the
shipment need to be included along with the invoice price in calculating the cost of capital, because they are "landing
costs" and are inventoriable costs the same as the cost of the inventory is. So the cost of the inventory is the $380
invoice price plus $20 for freight and insurance on the shipment, which equals an inventory cost of $400 per unit. That
is the amount that should be used to calculate the cost of capital to carry the inventory.

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Question 1 - CMA 1294 1.21 - Inventory Management

An example of a carrying cost is

Question 2 - ICMA 10.P2.170 - Inventory Management

A. Safety stock level.

Question 3 - ICMA 10.P2.166 - Inventory Management

Question 4 - CIA 593 IV.53 - Inventory Management

A. Reduced to offset the increased cost of carrying accounts receivable.

Question 5 - CMA 1290 1.20 - Inventory Management

A. Cost of running out of stock decreases.

(c) HOCK international, page 1

A. Cost of running out of stock decreases.

Question 6 - ICMA 10.P2.167 - Inventory Management

A. Purchase price per unit.

Question 7 - ICMA 10.P2.165 - Inventory Management

Question 8 - CMA 1294 4.7 - Inventory Management

A. Public warehouse rental charges.

Question 9 - CMA 1295 1.13 - Inventory Management

(c) HOCK international, page 2

All of the following are carrying costs of inventory except

Question 10 - ICMA 10.P2.162 - Inventory Management

All of the following are carrying costs of inventory except

Question 11 - CMA 692 1.22 - Inventory Management

A. Cost per unit of inventory.

Question 12 - CMA Sample Q1.8 - Inventory Management

Question 13 - ICMA 10.P2.168 - Inventory Management

Question 14 - CMA 1294 1.20 - Inventory Management

Question 15 - ICMA 10.P2.169 - Inventory Management

Question 16 - CMA 692 1.24 - Inventory Management

A. Level of customer dissatisfaction for back orders.

Question 17 - CMA 1292 1.24 - Inventory Management

Question 18 - CMA 694 1.27 - Inventory Management

A. Inspections of received inventory.

Question 18 - CMA 694 1.27 - Inventory Management

All of the following are inventory carrying costs except

A. Inspections of received inventory.

Question 19 - ICMA 10.P2.163 - Inventory Management

Question 20 - CMA 697 1.12 - Inventory Management

Question 21 - CMA 696 1.17 - Inventory Management

A. Variability of sales decreases.

Question 22 - CMA 1295 1.5 - Inventory Management

A. Obsolescence and deterioration.

Question 23 - ICMA 1603.P2.011 - Inventory Management

A. increase, and its days' sales in inventory will increase.

Question 24 - CMA 691 1.8 - Inventory Management

The result of the economic order quantity formula indicates the

A. Annual quantity of inventory to be carried.

Question 25 - ICMA 10.P2.164-ADAPTED - Inventory Management

Question 1 - CMA 1294 1.21 - Inventory Management

A. This is a cost of receiving inventory, and therefore is a cost of ordering inventory.

Question 1 - CMA 1294 1.21 - Inventory Management

A. This is a cost of receiving inventory, and therefore is a cost of ordering inventory.

Question 2 - ICMA 10.P2.170 - Inventory Management

increases, it will cause the EOQ to decrease, and vice versa.

Question 3 - ICMA 10.P2.166 - Inventory Management

Question 4 - CIA 593 IV.53 - Inventory Management

Question 5 - CMA 1290 1.20 - Inventory Management

Question 6 - ICMA 10.P2.167 - Inventory Management

(c) HOCK international, page 9

Question 7 - ICMA 10.P2.165 - Inventory Management

Question 8 - CMA 1294 4.7 - Inventory Management

Question 9 - CMA 1295 1.13 - Inventory Management

Question 10 - ICMA 10.P2.162 - Inventory Management

C. Insurance is a carrying cost of inventory.