# For a manufacturing company that you are consulting for, managers are unsure about making inventory decisions associated with a key engine component. The annual demand is estimated to be 15,000 units and is assumed to be constant throughout the year. Each unit costs \$80. The companys accounting department estimates that its opportunity cost for holding this item in stock for one year is 18% of the unit value. Each order placed with the supplier costs \$220. The companys policy is to place a fixed order for Q units whenever the inventory reaches a predetermined reorder point that provides sufficient stock to meet demand until the suppliers order can be shipped and received. As a consultant, your task is to develop and implement a decision model to help them arrive at the best decision. As a guide, consider the following:1. Define the data, uncontrollable inputs, and decision variables that influence total inventory cost.2. Develop mathematical functions that compute the annual ordering cost and annual holding cost based on average inventory held throughout the year in order to arrive at a model for total cost.3. Implement your model on a spreadsheet.4. Use data tables to find an approximate order quantity that results in the smallest total cost.5. Use Solver to verify your result.6. Conduct what-if analyses to study the sensitivity of total cost to changes in the model parameters.7. Explain your results and analysis in a memo to the vice president of operations.

Annual Demand = 15,000 units

Cost of each unit = \$ 80

Holding Cost = 18% of unit value

Ordering Cost = \$ 220 per order

For implementation of a good decision model regarding inventory after considering all type costs assisted to it such as: holding cost and ordering cost, concept of EOQ is applied.

EOQ = ((2 * Annual Demand* Ordering Cost) / (Holding Cost))1/2

= ((2 * 15000 * 220) / (80*18%))1/2

= 677 units

Hence this quantity states that this manufacturing company should reorder the quantity when it has 677 units.

2)Mathematically, costs related to inventory are computed in the following manner:

1) Annual ordering cost = Ordering cost per order * Number of orders in a year

= 220 * 15000/677 = 220 * 22 = 4840

2) Holding cost = Holding cost per unit * Average inventory throughout the year

Average inventory throughout the year = 15,000/12 = 1250 units

Holding cost = 18%* 1250 = 225

Total cost = 4840 + 225 = 5065

## Related Questions

Based on our understanding of inventory cost flows, and given the information listed below for the company's fiscal year 2018, determine beginning inventory in 2018. A physical count indicated that there was \$30,000 of inventory on hand at December 31, 2018 (i.e., ending inventory) Sales Freight In Purchase Returns and Allowances Sales Returns Purchase Discounts Purchases Gross Profit Sales Discounts \$317,000 \$7,000 \$8,000 \$9,000 \$4,000 \$245,000 \$75,000 \$1,000 Select one: a. \$36,000 b. \$29,000 C. \$21,000 d. \$32,000 e. \$22,000

e. \$22,000

Explanation:

The computation of the beginning inventory is shown below:

We know that,

Opening inventory + Purchase -   Purchase Discounts - Purchase Returns and Allowances + freight in + Gross profit = Sales - sales return - sales discount + ending inventory

Opening inventory + \$245,000 - \$4,000 - \$8,000 + \$7,000 + \$75,000 = \$317,000 - \$9,000 - \$1,000 + \$30,000

Opening inventory + \$315,000 = \$337,000

So, the opening inventory equals to

= \$22,000

The beginning inventory for fiscal year 2018 is \$29,000. This was calculated using the principles of inventory cost flows, which led us to the cost of goods sold (COGS). From there, we used the COGS, net purchases, and ending Inventory to calculate the beginning inventory.

### Explanation:

To solve this problem, inventory cost flow principles are applied. According to these, beginning inventory plus purchases minus ending inventory equals the cost of goods sold (COGS). In this case, we need to find the beginning inventory. Here is a step-by-step solution:

1. First, we find the net purchases. This is total purchases (\$245,000) minus Purchase Returns and Allowances (\$8,000) minus Purchase Discounts (\$4,000). This gives us \$233,000.
2. Next, we calculate the COGS. This is total sales (\$317,000) minus Sales Returns (\$9,000) minus Sales Discounts (\$1,000) minus gross profit (\$75,000). This gives us \$232,000.
3. Finally, we find the beginning inventory. According to inventory cost flows, Beginning Inventory + Net Purchases - Ending Inventory = COGS. In our case, Beginning Inventory = COGS - Net Purchases + Ending Inventory. This gives us \$232,000 - \$233,000 + \$30,000 = \$29,000.

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Consider the relative liquidity of the following assets:a. The funds in a money market account
b. A \$20 bill
c. A bond issued by a publicly traded company

Required:
Write down the assets in order of their liquidity, from most liquid to least liquid.

1. A \$20 bill

2. A bond issued by a publicly traded company

3. The funds in a money market account

Explanation:

Liquidity means that how easily an asset can be converted into cash.

1. Currency is the most liquid means of medium of exchange, so \$20 bill is highly liquid asset.

2. A publicly traded bond can be converted into cash within a couple of days, so it is second most liquid asset.

3. The funds invested in the money market can be withdrawn within agreed period of time which can be in months or days so it can be at seconf or third most liquid asset.

4. A car can take more than a month to locate a customer to sell it at appropriate price so it is the least liquid asset.

The order of liquidity, from most liquid to least liquid, is: funds in a money market account, a \$20 bill, a bond issued by a publicly traded company, and your car.

### Explanation:

In order of liquidity, from most liquid to least liquid, the assets would be:

1. The funds in a money market account - Money market accounts are highly liquid and can be easily accessed and withdrawn.
2. A \$20 bill - Cash is also highly liquid and can be also easily used for immediate transactions.
3. A bond issued by a publicly traded company - Bonds are less liquid than cash but can still be sold relatively quickly on the market.
4. Your car - Cars are generally considered illiquid assets because they cannot be easily converted into cash without a time-consuming process.

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When an organization hires new employees, there may be no more important part of that process than the organizational socialization process. This process takes place over 3 steps or phases; a. anticipatory socialization—those activities that take place prior to the first day on the job;
b. encounter—where the newcomer learns what the organization is really like; and
c. change and acquisition—where members master important tasks and roles.
d. This process can be achieved through a variety of processes and tactics.
e. This exercise will challenge your understanding of some of the characteristics of these tactics and processes.

Answer: The correct answers are "a. anticipatory socialization—those activities that take place prior to the first day on the job;", "b. encounter—where the newcomer learns what the organization is really like;" and  "c. change and acquisition—where members master important tasks and roles.".

Explanation: The 3 steps or phases of the organizational socialization process are:

1) Anticipatory socialization: those activities that take place prior to the first day on the job;

2) Encounter: where the newcomer learns what the organization is really like;

3) Change and acquisition: where members master important tasks and roles.

Crawl Inc., has 1,000 shares of 6%, \$50 par value, cumulative preferred stock and 50,000 shares of \$1 par value common stock outstanding at December 31, 2017, and December 31, 2018. The board of directors declared and paid a \$2,000 dividend in 2017. In 2018, \$10,000 of dividends are declared and paid. What are the dividends received by the common stockholders in 2018

total dividends distributed to common stock \$6,000

dividends per common stock \$0.12

Explanation:

preferred stock dividends = 1,000 x 6% x \$50 = \$3,000

since they are cumulative, if the dividends are not paid during one year, they must be paid in the next periods

the distribution of the \$10,000 in dividends in 2018:

• preferred dividends = \$1,000 + \$3,000 = \$4,000
• common stock dividends = \$6,000

dividends per common stock = \$6,000 / 50,000 = \$0.12

The list includes all balance sheet accounts related to cash from operating activities. Case X Case Y Case Z
Net income \$4,000 \$100,000 \$72,000
Depreciation expense 30,000 8,000 24,000
Accounts receivable increase (decrease) 40,000 20,000 (4,000)
Inventory increase (decrease) (20,000) (10,000) 10,000
Accounts payable increase (decrease) 24,000 (22,000) 14,000
Accrued liabilities increase (decrease) (44,000) 12,000 (8,000)
For each separate company, compute cash flows from operations using the indirect method. (Amounts to be deducted should be indicated by a minus sign.)

Explanation:

Using the indirect method.

Balance Sheet Accounts                 Case X   Case Y      Case Z

Net Income                                    \$4,000  \$100,000 \$72,000

Adjustments to reconcile net income to net cash provided by operations:

Depreciation                                 \$30,000   \$8,000       \$24,000

Account Receivables              \$-40,000  \$-20,000 \$4,000

Inventory                                   \$20,000 \$10,000 -\$10,000

Account Payable                       \$24,000 -\$22,000 \$14,000

Accrued Liability                         -\$44,000 \$12,000 -\$8000

Cash Flows from operating

activities                                    -\$6,000 \$88,000 \$96,000

LO 6.3How are costs allocated in an ABC system?

Step 1: Identify the activities that generate costs

Step 2: Now we will find cost pools and their relevant cost drivers

Step 3: Assign the cost of each activity (cost pool) on a fair basis which is cost drivers

cost assigned to total products of A = (cost pool/total units of relevant cost driver consumed) *units of cost driver consumed by total # of Products A

Step 4:  Divide the Answer from the step 3 by total units of product A produced to calculate unit cost

Step 5: Add prime cost per unit to it to calculate total unit cost of the product A

Explanation:

The costs in the ABC system are allocated to unit product on more fair basis than the tradition absorption costing which only assume one fair basis for allocation of overhead costs. ABC critisises traditional costing technique for using only one basis for absortion of Overheads.

Suppose both Mr. A and Mr. B drank 5 glasses of juices. Each glass of juice costs \$4. According to the Traditional absorption costing technique each individual must pay:

(5 Juices/2)*\$4=\$10

But ABC says its unfair, use a more appropriate basis for cost allocation. So upon investigating we came to know that Mr. A drank 3 glasses of juice and Mr. B drank 2 glasses of juice. So Mr. A must pay \$12(3*\$4) and Mr. B must pay \$8(2*\$4). This is more appropriate or fair basis of absorbing the overhead cost to each individual and is Activity Based Costing.