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 for this homework assignment.

QUESTION 1

Which of the following would cause average inventory holdings to decrease, other things held constant?

- The purchase price of inventory items decreases by 50 percent.
- The carrying price of an item decreases (as a percent of purchase price).
- The sales forecast is revised downward by 10 percent.
- Interest rates fall.
- Fixed order costs double.

QUESTION 2

During times of inflation, which of these inventory accounting methods is best for cash flow?

- 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.
- Specific identification, because it correctly identifies the actual item sold and so the actual cost is recorded on the income statement.
- Weighted average, because it smoothes the reported cost of goods sold over time.
- It doesn’t matter which you use since cash flow is unaffected by the choice of inventory identification method.
- FIFO, because the cheapest goods are recorded as being sold first, resulting in lower cost of goods sold and higher reported net income.

QUESTION 3

Which of the following is true of the Baumol model? Note that the optimal cash transfer amount is C*.

- If the total amount of cash needed during the year increases by 20%, then C* will increase by 20%.
- If the average cash balance increases by 20%, then the total holding costs will increase by 20%.
- If the average cash balance increases by 20% the total transactions costs will increase by 20%.
- The optimal transfer amount is the same for all companies.
- If the fixed costs of selling securities or obtaining a loan (cost per transaction) increase by

20%, then C* will increase by 20%.

QUESTION 4

Which of the following is true of the EOQ model? Note that the optimal order quantity, Q, will be called EOQ.

- If the annual sales, in units, increases by 20%, then EOQ will increase by 20%.
- If the average inventory increases by 20%, then the total carrying costs will increase by

20%.

- If the average inventory increases by 20% the total order costs will increase by 20%.
- The EOC is the same for all companies.
- If the fixed per order cost increases by 20%, then EOQ will increase by 20

QUESTION 5

Halliday Inc. receives a $2 million payment once a year. Of this amount, $700,000 is needed for cash payments made during the next year. Each time Halliday deposits money in its account, a charge of $2.00 is assessed to cover clerical costs. If Halliday can hold marketable securities that yield 5 percent, and then convert these securities to cash at a cost of only the $2 deposit charge, what is the total cost for one year of holding the minimum cost cash balance according to the Baumol model?

- $7,483
- $187
- $3,741
- $374
- $748