Master AICPA-Business Exam with Reliable Practice Questions
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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:
Correct : 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.
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An example of a carrying cost is:
Correct : 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.
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When the Economic Order Quantity (EOQ) model is used for a firm, which manufactures its inventory, ordering costs consist primarily of:
Correct : 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:.
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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?
Correct : 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.
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A company has total costs of $100,000, of which 40% is variable costs. What is the operating leverage?
Correct : C
Choice 'c' is correct. A shortcut computation for operating leverage is the ratio of fixed costs to variable costs. If total cost is $100,000 and variable cost is 40% of total costs (or $40,000), then fixed costs must be 60% (or $60,000). Operating leverage is then calculated as follows:
$60,000/$40,000 = 1.5
Choice 'a' is incorrect. .4 is obtained by dividing $100,000 into the variable cost of $40,000.
Choice 'b' is incorrect. .6 is obtained by dividing total costs into fixed costs.
Choice 'd' is incorrect. 2.5 is obtained by dividing total costs by variable costs.
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