Directions: Answer the following five questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell. Each question is worth five points apiece for a total of 20 points for this homework assignment.
1. During times of inflation, which of these inventory accounting methods is best for cash flow?
a. FIFO, because the cheapest goods are recorded as being sold first, resulting in lower cost of goods sold and higher reported net income.
b. LIFO, because the most expensive goods are recorded as being sold first, resulting in a higher cost of goods sold and a lower reported net income.
c. Specific identification, because it correctly identifies the actual item sold and so the actual cost is recorded on the income statement.
d. Weighted average, because it smoothes the reported cost of goods sold over time.
e. It doesn't matter which you use since cash flow is unaffected by the choice of inventory identification method.
2. Which of the following is true of the Baumol model? Note that the optimal cash transfer amount is C*?
a. If the fixed costs of selling securities or obtaining a loan (cost per transaction) increase by 20%, then C* will increase by 20%
b. If the total amount of cash needed during the year increases by 20%, then C* will increase by 20%.
c. If the average cash balance increases by 20%, then the total holding costs will increase by 20%.
d. If the average cash balance increases by 20% the total transactions costs will increase by 20%.
e. The optimal transfer amount is the same for all companies.
3. Suppose the Campus Bookstore purchases 50,000 boxes of writing tablets every year. Ordering costs are $100 per order and carrying costs are $0.40 per box. Moreover, management has determined that the EOQ is 5,000 boxes. The vendor now offers a quantity discount of $0.20 per box if the company buys tablets in order sizes of 10,000 boxes. Determine the before-tax benefit or loss of accepting the quantity discount. (Assume the carrying cost remains at $0.40 per box whether or not the discount is taken.)
a. $1,000 loss
b. $1,000 benefit
c. $ 500 loss
d. $ 500 benefit
e. $ 0 (The change would not affect profits.)
4. Crystal Clear Company purchases 50,000 gallons of distilled water each year. Ordering costs are $100 per order, and the carrying cost, as a percentage of inventory value, is 80 percent. The purchase price to CCC is $0.50 per gallon. Management currently orders the EOQ each time an order is placed. No safety stock is carried. The supplier is now offering a quantity discount of $0.03 per gallon if CCC orders 10,000 gallons at a time. Should CCC take the discount?
a. From a cost standpoint, CCC is indifferent.
b. No, the cost exceeds the benefit by $500.
c. No, the cost exceeds the benefit by $1,000.
d. Yes, the benefit exceeds the cost by $500.
e. Yes, the benefit exceeds the cost by $1,120.
5. Fullerton Wine Company is a retailer which sells vintage wines. The company has established a policy of reordering inventory every 30 days. A recently employed MBA has considered Fullerton's inventory problem from the EOQ model viewpoint. If the following constitute the relevant data, how does the current policy compare with the optimal policy?
Ordering cost = $10 per order
Carrying cost = 20% of purchase price
Purchase price = $10 per unit
Total sales for year = 1,000 units
Safety stock = 0
a. Total costs will be the same, since the current policy is optimal.
b. Total costs under the current policy will be less than total costs under the EOQ by $10.
c. Total costs under the current policy exceed those under the EOQ by $3.
d. Total costs under the current policy exceed those under the EOQ by $10.
e. Cannot be determined due to insufficient information.