Question 1

Karloff Medical Supply maintains an average inventory of 2,000 human skulls for sale to medical schools and ﬁlmmakers. The carrying cost per skull per year is estimated to be $5. Boris places an
Order for 10,000 skulls on the ﬁrst of each month and the order cost is $75. What are the total
Restocking costs using the EOQ?

Accepted Answer

A)   $3,184
B)   $4,102
C)   $4,744
D)   $4,981
E)   $5,169F) A) and E)
G) A) and D)

Question 2

Under credit terms of 2/10, net 25, customers should:

Accepted Answer

A)   Always pay on the 25th day.
B)   Take the 10 percent discount and pay immediately.
C)   Take the discount and pay on the 2nd day.
D)   Either take the discount or pay on the 25th day.
E)   Both take the discount and pay on the 25th day.F) None of the above
G) A) and C)

Question 3

Green Enterprises builds custom cabinets for new homes. The demand for these cabinets is based
upon the production capability of Green Enterprises.

Accepted Answer

A) True 
 B)False

Question 4

The percentage cost of credit varies with the price of the item purchased.

Accepted Answer

A) True 
 B)False

Question 5

Which one of the following statements is correct concerning inventory costs?

Accepted Answer

A)   Lost sales are costs related to safety reserves.
B)   A loss due to a theft is a shortage cost.
C)   Carrying costs decrease as inventory levels rise.
D)   The goal of inventory management is the minimization of storage costs.
E)   The cost to set up a production run is a carrying cost.F) A) and B)
G) B) and E)

Question 6

What is the incremental cash ﬂow per year from switching credit policies?

Accepted Answer

A)   $415
B)   $475
C)   $525
D)   $1,225
E)   $1,750F) A) and B)
G) A) and C)

Question 7

The basic factors to be evaluated in the credit evaluation process, the ﬁve Cs of credit, are:

Accepted Answer

A)   Conditions, control, cessation, capital, and capacity.
B)   Conditions, character, capital, control, and capacity.
C)   Capital, collateral, control, character, and capacity.
D)   Character, capacity, control, cessation, and collateral.
E)   Character, capacity, capital, collateral, and conditions.F) B) and D)
G) A) and E)

Question 8

Which of the following would tend to increase decrease the credit period?

Accepted Answer

A)   The product is a low-priced item.
B)   The product is a standardized raw material.
C)   The product is a high-priced item.
D)   The product is well established in the marketplace.
E)   The product has low collateral value.F) A) and D)
G) D) and E)

Question 9

Stamford, Inc. currently sells 8,350 units a month for total monthly sales of $179,500. The company is considering replacing its current cash only credit policy with a net 30 policy. The variable cost per
Unit is $6.23 and the monthly interest rate is 2 percent. What is the switch break-even level of
Sales?

Accepted Answer

A)   8,416 units
B)   8,517 units
C)   8,587 units
D)   8,606 units
E)   8,686 unitsF) D) and E)
G) B) and E)

Question 10

All else equal, a ﬁrm that holds safety stocks of inventory will have a lower economic order quantity
(EOQ) than a ﬁrm that does not.

Accepted Answer

A) True 
 B)False

Question 11

You are considering switching from an all cash credit policy to a net 30 credit policy. You do not expect the switch to affect either your sales quantity or your sales price. Ignoring interest and
Assuming that every month has 30 days, your net present value of the switch will be equal to:

Accepted Answer

A)   Zero.
B)   Your selling price per unit.
C)   Your selling price per unit multiplied by -1.
D)   Your selling price per unit multiplied by -30.
E)   Your total monthly sales multiplied by -1.F) B) and E)
G) All of the above

Question 12

Which of the following would not be considered a carrying cost of credit?

Accepted Answer

A)   Suzie buys $200 of goods on credit but never pays her bill.
B)   It requires 5 hours a week, to review potential new suppliers.
C)   It costs $500 a week to employ Jack to call customers concerning their late payments.
D)   Maxwell, Inc. requires an annual rate of return of 12% on its receivables.
E)   It requires 5 hours a week, at an annual salary of $50,000, for the manager to approve credit applications.F) A) and B)
G) A) and E)

Question 13

The Gardeners Co. currently sells 1,800 units a month for total monthly sales of $79,200. The company is considering replacing its current cash only credit policy with a net 30 policy. The
Variable cost per unit is $34 and the monthly interest rate is 1.7 percent. What is the switch break-
Even level of sales?

Accepted Answer

A)   1,943 units
B)   2,017 units
C)   2,108 units
D)   2,406 units
E)   2,548 unitsF) C) and E)
G) A) and D)

Question 14

Which one of the following statements generally applies to the credit period?

Accepted Answer

A)   The larger the account size, the longer the credit period.
B)   The greater the competition, the shorter the credit period.
C)   The more perishable a product, the longer the credit period.
D)   The higher the demand for a product, the longer the credit period.
E)   The lower the cost of an item, the longer the normal credit period.F) D) and E)
G) None of the above

Question 15

Your supplier grants you credit terms of 2/10, net 40. What is the effective annual rate of not taking the discount if you purchase $2,500 worth of merchandise?

Accepted Answer

A)   14.9 percent
B)   17.8 percent
C)   21.9 percent
D)   27.9 percent
E)   31.0 percentF) C) and E)
G) B) and C)

Question 16

The total investment in receivables mainly depends on the total amount of cash sales and the cash
discount amount.

Accepted Answer

A) True 
 B)False

Question 17

Today, July 8, you bought $26,400 worth of merchandise from your supplier. The credit terms are 2/5, net 15. By what day do you have to make your payment to receive the discount?

Accepted Answer

A)   July 10
B)   July 11
C)   July 13
D)   July 18
E)   July 23F) A) and B)
G) A) and E)

Question 18

You just purchased $14,700 of goods from your supplier with credit terms of 2/10, net 30. What is the discounted price?

Accepted Answer

A)   $13,230
B)   $13,769
C)   $14,001
D)   $14,406
E)   $14,700F) C) and D)
G) A) and C)

Question 19

Bradley Mfg. changed its credit terms from 2/10 net 30 to 2/10 net 40. In doing so, the ﬁrm has
lowered the effective annual cost of credit for their customers.

Accepted Answer

A) True 
 B)False

Question 20

All else equal, a ﬁrm that holds safety stocks of inventory will have a lower level of average
inventory than a ﬁrm that does not.

Accepted Answer

A) True 
 B)False

Exam 20: Credit and Inventory Management

Correct Answer
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Correct Answer
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Which one of the following statements generally applies to the credit period?

Correct Answer
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Which of the following would tend to increase decrease the credit period?

Correct Answer
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Under credit terms of 2/10, net 25, customers should:

Correct Answer
verified

Bradley Mfg. changed its credit terms from 2/10 net 30 to 2/10 net 40. In doing so, the ﬁrm has lowered the effective annual cost of credit for their customers.

Correct Answer
verified

Green Enterprises builds custom cabinets for new homes. The demand for these cabinets is based upon the production capability of Green Enterprises.

Correct Answer
verified

Your supplier grants you credit terms of 2/10, net 40. What is the effective annual rate of not taking the discount if you purchase $2,500 worth of merchandise?

Correct Answer
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Which one of the following statements is correct concerning inventory costs?

Correct Answer
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The total investment in receivables mainly depends on the total amount of cash sales and the cash discount amount.

Correct Answer
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You just purchased $14,700 of goods from your supplier with credit terms of 2/10, net 30. What is the discounted price?

Correct Answer
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Which of the following would not be considered a carrying cost of credit?

Correct Answer
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What is the incremental cash ﬂow per year from switching credit policies?

Correct Answer
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All else equal, a ﬁrm that holds safety stocks of inventory will have a lower economic order quantity (EOQ) than a ﬁrm that does not.

Correct Answer
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Correct Answer
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All else equal, a ﬁrm that holds safety stocks of inventory will have a lower level of average inventory than a ﬁrm that does not.

Correct Answer
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Today, July 8, you bought $26,400 worth of merchandise from your supplier. The credit terms are 2/5, net 15. By what day do you have to make your payment to receive the discount?

Correct Answer
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The basic factors to be evaluated in the credit evaluation process, the ﬁve Cs of credit, are:

Correct Answer
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You are considering switching from an all cash credit policy to a net 30 credit policy. You do not expect the switch to affect either your sales quantity or your sales price. Ignoring interest and Assuming that every month has 30 days, your net present value of the switch will be equal to:

Correct Answer
verified

The percentage cost of credit varies with the price of the item purchased.

Correct Answer
verified

Exam 20: Credit and Inventory Management

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which one of the following statements generally applies to the credit period?

Correct AnswerverifiedShow Answer

Which of the following would tend to increase decrease the credit period?

Correct AnswerverifiedShow Answer

Under credit terms of 2/10, net 25, customers should:

Correct AnswerverifiedShow Answer

Bradley Mfg. changed its credit terms from 2/10 net 30 to 2/10 net 40. In doing so, the ﬁrm has lowered the effective annual cost of credit for their customers.

Correct AnswerverifiedShow Answer

Green Enterprises builds custom cabinets for new homes. The demand for these cabinets is based upon the production capability of Green Enterprises.

Correct AnswerverifiedShow Answer

Your supplier grants you credit terms of 2/10, net 40. What is the effective annual rate of not taking the discount if you purchase $2,500 worth of merchandise?

Correct AnswerverifiedShow Answer

Which one of the following statements is correct concerning inventory costs?

Correct AnswerverifiedShow Answer

The total investment in receivables mainly depends on the total amount of cash sales and the cash discount amount.

Correct AnswerverifiedShow Answer

You just purchased $14,700 of goods from your supplier with credit terms of 2/10, net 30. What is the discounted price?

Correct AnswerverifiedShow Answer

Which of the following would not be considered a carrying cost of credit?

Correct AnswerverifiedShow Answer

What is the incremental cash ﬂow per year from switching credit policies?

Correct AnswerverifiedShow Answer

All else equal, a ﬁrm that holds safety stocks of inventory will have a lower economic order quantity (EOQ) than a ﬁrm that does not.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

All else equal, a ﬁrm that holds safety stocks of inventory will have a lower level of average inventory than a ﬁrm that does not.

Correct AnswerverifiedShow Answer

Today, July 8, you bought $26,400 worth of merchandise from your supplier. The credit terms are 2/5, net 15. By what day do you have to make your payment to receive the discount?

Correct AnswerverifiedShow Answer

The basic factors to be evaluated in the credit evaluation process, the ﬁve Cs of credit, are:

Correct AnswerverifiedShow Answer

You are considering switching from an all cash credit policy to a net 30 credit policy. You do not expect the switch to affect either your sales quantity or your sales price. Ignoring interest and Assuming that every month has 30 days, your net present value of the switch will be equal to:

Correct AnswerverifiedShow Answer

The percentage cost of credit varies with the price of the item purchased.

Correct AnswerverifiedShow Answer

Correct Answer
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