What is the annual carrying cost, stated as a percentage of investment in inventory, that would be used in model?
Answer(s): A
The annual carrying costs are US $12,750 for the warehouse, US $1,500 for insurance, II and US $2,260 for proper taxes. These costs total US $16,500. In addition, the company desires a 12% after-tax return on investments. Because the tax rate is 40%, the 12% after-tax return equals a 20% before-tax return 12% - 60%). A 20% return on the US $75,000 average investment in inventory is US $15,000. Hence, the total carrying cost is US $31,500 $16,500 + $15,000). This amount is 42% of the US $75,000 investment in inventory.
When the economic order quantity EOQ) decision model is employed, the List A are being offset or balanced
The objective of the EOQ model is to find an optimal order quantity that balances carrying and ordering costs. Only variable costs should be considered. The EOQ is the point where the ordering cost and carrying cost curves intersect. It corresponds to the minimum point on the total inventory cost curve.
The calculation of an economic order quantity EOQ) considers:
Answer(s): D
The determination of the economic order quantity balances the variable costs of ordering and carrying inventory. Factors in the equation include the cost of placing an order, unit carrying cost, and annual demand in units. Carrying costs include storage costs, handling costs, insurance, property takes, obsolescence, and the opportunity cost of investing capital in inventory. Thus, the return on capital that is forgone when it is invested in inventory should be considered.
A characteristic of the basic economic order quantity EOQ) model is that it:
The basic EOQ model equals the square root of the quotient of 1) the product of twice the demand times the cost per order, ) divided by the periodic carrying cost. Hence, the model is relatively insensitive to error. A given percentage error in a value results in a lower percentage change in the EOQ.
Companies that adapt just-in-time purchasing systems often experience
Answer(s): B
The objective of JIT is to reduce carrying costs by eliminating inventories and increasing the deliveries made by suppliers. Ideally, shipments of raw materials are received just in time to be incorporated into the manufacturing process. The focus of quality control under JIT is the prevention of quality problems. Quality' control is shifted to the supplier. JIT companies typically do not inspect incoming goods; the assumption is that receipts are of perfect quality. Suppliers are limited to those who guarantee perfect quality and prompt delivery.
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