2.1. For process A what is the scrap value of the normal loss?

a. £200
b. £2,000
c. £1,000
d. £0
2.2. What is the abnormal loss for process A in units?

a. 100
b. 200
c. 300
d. 400
2.3. What is the cost per kg for process A?

a. £18.575
b. £13.454
c. £14.575
d. £16.575
Solution

Department overhead absorption rate = £6,840 / (£7,200 + £4,200) = 60% of direct labour
cost

Process A

Total costs: £

Direct material (2,000kg x £5/kg) 10,000

Direct labour 7,200
Process plant time (140hrs x £60/hr) 8,400
Department overhead (60% x £7,200) 4,320
29,920
Scrap value of normal loss (20% x 2,000kg x £0.50/kg) 200
29,720
Cost/kg = (Total cost – scrap value of normal loss)/expected output

= £29,720 / (2,000 x 80%) = £18.575

Process A

kg £ kg £
Direct 2,000 10,000 Normal loss 400 200
material
Direct labour 7,200 Output 1,400 26,005
Process plant 8,400 Abnormal 200 3,715
hire loss
Departmental 4,320
overhead
2,000 29,920 2,000 29,920
2.4. Carrel produces two types of jacket, Blouson and Bomber, in its factory that is divided
into two departments, cutting and stitching. The firm wishes to calculate a fixed overhead
cost per unit figure from the following budgeted data.

Cutting dept Stitching dept

Direct and allocated fixed overheads £120,000 £72,000
Labour hours per unit
Blouson 0.05 hours 0.20 hours
Bomber 0.10 hours 0.25 hours
Budgeted production
Blouson 6,000 units 6,000 units
Bomber 6,000 units 6,000 units
If fixed overheads are absorbed by reference to labour hours, the fixed overhead
cost of a Bomber would be:

a. £5.33
b. £6.67
c. £12.00
d. £20.00
Solution

Cutting department:

Budgeted hours = (6,000 x 0.05) + (6,000 x 0.10) = 900 hours Absorption rate for the
cutting department = £120,000/900 = £133.33

Stitching department:

Budgeted hours = (6,000 x 0.20) + (6,000 x 0.25) = 2,700 hours

Absorption rate for the stitching department = £70,000/2,700 = £26.67

Fixed overhead cost of a Bomber = (0.10 x £133.33) + (0.25 x £26.67) = £20

2.5. A company budgeted to produce 3,000 units of a single product in a period at a

budgeted cost per unit, build up as follows:

£/unit
Direct costs 12
Variable overhead 5
Fixed overhead 9
£26
In the period covered by the budget:

Actual sales were 3,500 units and finished stocks decreased by 300 units
Actual fixed overhead expenditure was 5% above that budgeted – all other costs were as
budgeted

Determine which of the following statements is correct

a. Overheads in the period were £450 over-absorbed

b. Overheads in the period were £450 under-absorbed
c. Overheads in the period were £1,450 over-absorbed
d. Overheads in the period were £1,450 under-absorbed
Solution

Over/(under) absorption = absorbed overheads – incurred overheads

Since variable overhead costs were as budgeted (£5 per unit) there was no under- or over-
absorption of variable overheads

Budgeted fixed overhead = 3,000 units x £9 = £27,000

actual production volume = 3,500 units – 300 units = 3,200 units

Fixed overhead absorbed (3,200 x £9) 28,800

Fixed overhead incurred (£27,000 x 1.05) 28,350

Over-absorbed fixed overheads 450

2.6. A management consultancy recovers overheads on chargeable consulting hours.

Budgeted overheads were £615,000 and actual consulting hours were 32,150. Overheads
were under-recovered by £35,000.

If actual overheads were £694,075 what was the overhead absorption rate per hour?

a. £19.13
b. £20.50
c. £21.59
d. £22.68
Solution

Actual fixed overhead 694,075

Under-recovered overhead 35,000

Absorbed fixed overhead 659,075

Actual consulting hours: 32,150

Absorption rate = £659,075/32,150 hours = £20.50 per hour

2.7. A company with a single product sells more units than it manufactures in a period.

Which of the following correctly describes the use of marginal costing in

comparison with absorption costing inthe above situation?

a. Both profit and stock values will be higher

b. Both profit and stock values will be lower
c. Profit will be higher; stock values will be lower
d. Profit will be lower; stock values will be higher
2.8. A company with a single product manufactured 10,200 units in a period in which
10,300 units were sold. Consider the following statements:

(i) The profit for the period would be higher using absorption costing (compared
with marginal costing)
(ii) (ii) Stock values would be higher using absorption costing (compared with
marginal costing)
Are the statements true or false in relation to the situation described?

Statement (i) Statement (ii)

a. False False
b. False True
c. True False
d. True True
2.9. A company sells more than it manufactures in a period.

Which of the following explains the difference in profit between absorption and
marginal costing in the above situation?

a. Absorption costing profit is higher because of the difference in inventory levels

b. Absorption costing profit is lower because of the difference in inventory levels
c. Absorption costing profit is higher because of overhead over-absorption
d. Absorption costing profit is lower because of overhead under-absorption
2.10. What distinguishes absorption costing from marginal costing?

a. Product costs include both prime cost and production overhead

b. Product costs include both production and non-production costs
c. Stock valuation includes a share of all production costs
d. Stock valuation includes a share of all costs
2.11. A company uses a marginal costing system. 10,000 units of its single product were
manufactured in a period duringwhich 9,760 units were sold.

If absorption costing is applied instead what would be the effect on profit?

a. Higher by (240 units x fixed production overhead cost per unit)

b. Lower by (240 units x fixed production overhead cost per unit)
c. Higher by [240 units x (fixed production overhead cost per unit + fixed non-
production overhead cost per unit)]
 d. Lower by [240 units x (fixed production overhead cost per unit + fixed non-
production overhead cost per unit)
2.12. A company with a single product sells more units than it manufactures in a period.

Which of the following correctly describes the use of marginal costing in

comparison with absorption costing in the above situation?

a. Both profit and stock values will be higher

b. Both profit and stock values will be lower
c. Profit will be higher; stock values will be lower
d. Profit will be lower; stock values will be higher
2.13. In a period where opening stocks were 15,000 units and closing stocks were 20,000
units, a firm had a profit of £130,000 using absorption costing.

If the fixed overhead absorption rate were £8 per unit, the profit using marginal
costing would be:

a. £90,000
b. £130,000
c. £170,000
d. impossible to calculate without more information
Solution

Difference in profit = change in stock level x fixed overhead per unit

= (15,000 – 20,000) x £8 = £40,000

The stock level increased during the period therefore the absorption costing profit is
higher than the marginal costing profit.

Marginal costing profit = £130,000 - £40,000 = £90,000

If you selected option B you decided there would be no difference in the report profits. If
stock levels change there will always be a difference between the marginal and
absorption costing profits.

If you selected option C you calculated the correct monetary value of the profit difference
but you misinterpreted its ‘direction’.

The following data are to be used for 2.uestions 14 to 16

A firm makes special assemblies to customers’ orders and uses job costing. The data for a
period are:

Job numberAA10 Job numberBB15 Job numberCC20

£ £ £
Opening WIP 26,800 42,790 0
Material added in 17,275 0 18,500
period
 Labour for period 14,500 3,500 24,600

The budgeted overheads for the period were £126,000. Overheads are absorbed on the
basis of labour costs.

2.14. What overhead should be added to job number CC20 for the period?

a. £24,600
b. £65,157
c. £72,761
d. £126,000
Job number BB15 was completed and delivered during the period and the firm wishes to
earn 33.33% profit on sales.

2.15. What is the selling price of job number BB15?

a. £69,435
b. £70,804
c. £75,521
d. £84,963
Solution

Opening WIP value 42,790

Added material 0

Labour in period 3,500

Overhead (£3,500 x 2.957746) 10,352

Total cost 56,642

Profit (1/3 on sales = 50% on cost) 28,321

Sales price 84,963

2.16. What was the approximate value of closing WIP at the end of the period?

a. £58,575
b. £101,675
c. £147,965
d. £217,323
Solution

AA10 CC20 Total

£ £
Opening WIP 26,800 0
Materials added 17,275 18,500
Labour 14,500 24,600
Overhead (=labour cost x 2.957746) 42,887 72,761
 131,336 85,987 £217,323
(exclude BB15 as it was completed and delivered during the period

2.17. Which of the following is NOT likely to be used in the non-profit organisation?

a. cost per patient

b. cost per bed-day
c. bed throughput
d. profit per patient
2.18. For operational purposes, for a company operation a fleet of delivery vehicles,
which of the following cost units would be most useful?

a. Cost per mile run

b. Cost per drive hour
c. Cost per tone mile
d. Cost per kilogram carried
Solution

Revenue is most likely to be based on the quantity delivered and the distance traveled. In
addition, costs are likely to relate to both distance traveled and weight of load. Cost per
tone mile gives a measure of both quantity and distance

2.19. Which of the following would be appropriate cost units for a passenger coach
company?

(i). Vehicle cost per passenger – kilometer

(ii). Fuel cost for each vehicle per kilometer

(iii). Fixed cost per kilometre

a. (i) only
b. (ii) only
c. (iii) only
d. All of them
Solution

The vehicle cost per passenger-kilometer (i) is appropriate cost control purposes because
it combines the distance traveled and the number of passengers carried, both of which
affect cost.

The fuel cost for each vehicle per kilometer (ii) can be useful for control purposes
because it focuses on a particular aspect of the cost of operating each vehicle

The fixed cost per kilometer (iii) is not particularly useful for control purposes because it
varies with the number of kilometers traveled.

2.20. The following information is available for the Whitely Hotel for the latest
thirty day period.
Number of rooms available per night 40

Percentage occupancy achieved 65%

Room servicing cost incurred £3,900

The room servicing cost per occupied room-night last period, to the nearest penny, was:

a. £3.25
b. £5.00
c. £97.50
d. £150.00
Solution

Number of occupied room-nights = 40 rooms x 30 nights x 65% = 780

Room servicing cost per occupied room – night = £3,900/780 = £5

Option A is the cost per available room-night. This makes no allowance for the 65%
occupancy achieved. If you selected option C you simply divided £3,900 by 40 rooms. This
does not account for the number of nights in the period in the period, nor the percentage
occupancy achieved. If you selected option D you calculated the cost per occupied room,
rather than the cost per occupied room-night.

2.21. In a process account, abnormal losses are valued:

a. At their scrap value

b. The same as good production
c. At the cost of raw materials
d. At good production cost less scrap value
Solution

Abnormal losses are valued at the same unit rate as good production, so that their
occurrence does not affect the cost of good production.

The scrap value of the abnormal loss (option A) is credited to a separate abnormal loss
account; it does not appear in the process account. Option C is incorrect because
abnormal losses also absorb some conversion costs. Option D is incorrect because the
scrap value of the abnormal loss does not appear in the process account.

2.22. A company needs to produce 340 litres of Chemical X. This is a normal loss of
10% of the material input into the process. During a given month the company did
produce 340 litres of Good production, although there was an abnormal loss of 5% of the
material input into the process.

How many litres of material were input into the process during the month?

a. 357 litres
b. 374 litres
 c. 391 litres
d. 400 litres
Solution

The total loss was 15% of the material input. The 340 litres of good output therefore
represents 85% of the total material input.

Therefore, material input = 340/0.85 = 400 litres

Options A and B are incorrect because they represent a further five per cent and ten per
cent respectively, added to the units of good production.

If you selected option C you simply added 15 per cent to the 340 litres of good production.
However, the loss are started as a percentage of input, not as a percentage of output.

The following information related to 2.uestions 23 and 24.

Patacake Ltd produces a certain food item in a manufacturing process. On 1 November,

there was no opening stock of work in process. During November 500, units of material
were input to the process, with a cost of £9,000. Direct labour costs in November were
£3,840. Production overhead is absorbed at the rate of 200% of direct labour costs. Closing
stock on 30 November consisted od 100 units which were 100% complete as to materials
and 80% complete as to labour and overhead. There was no loss in process.

2.23. The full production cost of completed units during November was

a. £10,400
b. £16,416
c. £16,800
d. £20,520
2.24. The value of the closing work in progress on 30 November is

a. £2,440
b. £3,720
c. £4,104
d. £20,520
Solution

Using the data from answer 7 above, extend step 3 to calculate the value of the work in
progress.

Cost element Number of Cost per equivalent Total

equivalent units units
Materials 100 18 1,800
Labour& overhead 80 24 1,920
If you selected option A you omitted the absorption of overhead into the process costs. If
you selected option C you did not allow for the fact that the work in progress was
incomplete. Option D is the total process cost for the period, some of which must be
allocated to the completed output.

The following data relates to questions 2.25 and 2.26

PR Ltd manufactures two joint products, P and R, in a common process. Data for June are
as follows.

Opening stock 1,000

Direct materials added 10,000

Conversation costs 12,000

Closing stock 3,000

Production Sales Sales price

Units Units £ per unit

P 4,000 5,000 5

R 6,000 5,000 10

2.25. If cost are apportioned between joint products on a sales value basis, what was
the cost per unit of product R in June?

a. £1.25
b. £2.22
c. £2.50
d. £2.75
Solution

Total production costs (£)

Opening stock 1,000

Direct materials added 10,000

Conversation costs 12,000

23,000

Less closing stock 3,000

Total production cost 20,000

Production Sales Apportioned

Units value cost £
£
 P 4,000 (x £5) 20,000 (£20,000 x 20/80) 5,000
R 6,000 (x £10) 60,000 (£20,000 x 60/80) 15,000
80,000 20,000
Product R cost per unit = £15,000/6,000 = £2.50 per unit.

Option A is the cost per unit for product P, and if you selected option B you apportioned
the production costs on the basis of units sold.

If you selected option D you made no adjustment for stocks when calculating the total
costs.

2.26. If cost is apportioned between joint products on a physical unit basis, what was
the total cost of product P production in June?

a. £8,000
b. £8,800
c. £10,000
d. £12,000
Solution

From the previous answer, total production cost to be apportioned = £20,000.

Productions Units Apportioned cost £

P 4,000 (£20,000 x 4/10) 8,000
R 6,000 (£20,000 x 6/10) 12,000
10,000 20,000
If you selected option B you made no adjustment for stocks when calculating the total
costs.

If you selected option C you apportioned the production costs on the basis of the units
sold. Option D is the total cost of product R.

2.27. Which of the following statements in/are correct?

(i). A by- product is a product produced at the same time as other products which has a
relatively low volume compared with the other products.

(ii). Since a by-product is a saleable item it should be separately costed in the process
account, and should absorb some of the process costs

(iii). Costs incurred prior to the point of separation are known as common or joint costs.

a. (i) and (ii)

b. (ii) and (iii)
c. (i) and (iii)
d. (iii) only
Solution
Statement (i) is incorrect because the value of the product described could be relatively
high even though the output volume is relatively low. This product would then be classified
as a joint product.

Statement (ii) is incorrect. Since a by-product is not important as a saleable item, it is not
separately costed and does not absorb any process costs.

Statement (iii) is correct. These common or joint costs are allocated or apportioned to the
joint products

2.28. Production cost centre

A B C D
Overhead 18,757 29,025 46,340 42,293
expenditure
(£)
Direct labour 3,080 6,750 3,760 2,420
hours
Machine hours 580 1,310 3,380 2,640
Which cost centre has the highest hourly overhead absorption rate?

a. Production Cost Centre A

b. Production Cost Centre B
c. Production Cost Centre C
d. Production Cost Centre D
2.29. A company sold 56,000 units of its single product in a period for a total revenue of
£700,000. Finished stock increased by 4,000 units in the period. Costs in the period were:

Variable production £3·60 per unit

Fixed production £258,000 (absorbed on the actual number of units
produced)
Fixed non-production £144,000
Using absorption costing, what was the profit for the period?

a. £82,000
b. £96,400
c. £113,600
d. £123,200
2.30. A cost centre is charged with the following actual overhead costs for a period:

Allocated costs $28,720

Apportioned costs $10,260

Overheads were absorbed in the cost centre over the period on 1,760 actual labour hours
at a pre-determined absorption rate of $21·50 per hour. Actual labour hours worked in the
period were 90 hours above budget.

What was the overhead over/under absorption in the cost centre?

 a. $1,140
b. $1,935
c. $3,055
d. $9,120
2.31. In its first year of operations a company produced 100,000 units of a product and
sold 80,000 units at $9 per unit. It earned a marginal costing profit of $200,000. It
calculates that its fixed production overhead per unit is $5.

What profit would it have earned under absorption costing systems?

a. $300,000
b. $280,000
c. $250,000
d. 500,000
Solution

200,000 + (100,000 – 80,000) x $5 = $300,000

2.32. Last year, Bryan Air carried excess baggage of 250,000 kg over a distance of 7,500
km at a cost of $3,750,000 for the extra fuel.

What is the cost per kg-km?

a. $2.00
b. $0.002
c. $33.33
d. $500.00
Solutions

Total number of kg-km = 250,000 x 7,500 = 1,875,000,000

Cost per kg-km = $3,750,000/1,875,000,000 = $0.002

2.33. Which of the following are likely to use service costing?

(i) A college
(ii) A hotel
(iii) A plumber
a. (i) (ii) (iii)
b. (i) (ii)
c. (ii) only
d. (ii) (iii) only
2.34. The following items may be used in costing batches

(i) Actual material cost

(ii) Actual manufacturing overheads
(iii) Absorbed manufacturing overheads
(iv) Actual labor cost
Which of the above are contained in a typical batch cost?
 a. (i), (ii) and (iv)
b. (i) (iv)
c. (i) (iii) (iv)
d. (i) (ii) (iii) (iv)
2.35. Which of the following would be appropriate cost unit for a passenger coach
company?

(i) Vehicle cost per passenger-kilometer

(ii) Fuel cost for each vehicle per kilometer
(iii) Fixed cost per kilometer
a. (i)
b. (i) (ii)
c. (i) (iii)
d. (ii) (iii)
2.36. Which of the following costing methods is most likely to use by a company
involved in the manufacture of li2.uid soap?

a. Batch costing
b. Service costing
c. Job costing
d. Process costing
2.37. Which of the following would be considered a service industry?
(i) An airline company

(ii) A railway company

(iii) A firm of accountants
a. (i)
b. (i) (ii)
c. (i) (ii) (iii)
d. (ii) (iii)
2.38. Which of the following statements about process losses are correct?

(i) Units of normal loss should be valued at full cost per unit
(ii) Units of abnormal loss should be valued at scrap value
a. (i) only
b. (ii) only
c. Both of them
d. Neither of them
Solution

(i) Units of normal loss should be valued at scrap value

(ii) Units of abnormal loss should be valued at same rate as good units
2.39. Under absorption costing, the total cost of a product will include:

a. Direct costs only

b. Variable costs only
c. All direct and indirect costs excluding a share of fixed overhead
d. All direct and indirect costs
2.40. Over- absorbed overheads occur when
 a. Absorbed overheads exceed actual overheads
b. Absorbed overheads exceed budgeted overheads
c. Actual overheads exceed absorbed overheads
d. Actual overheads exceed budgeted overheads
2.41. A business absorbs its fixed production overhead on the basis of direct labor hours,
The budgeted direct labor hours for week 24 were 4,200. During that week, 4,050 direct
labor hours were worked and the production overhead incurred was $16,700. The
overhead was under-absorbed by $1310. The budgeted fixed overhead for the week (to
the nearest $10) was:
a. 15,960
b. 20,567
c. 15,600
d. 15,900
Actual overhead $16,700
Under-absorbed $(1,310)
Overhead absorbed $15,390
OAR = 15,390/4,050 = $3,80 per hour
Budgeted fixed overhead = 4,200 x 3,8 = $15,960
2.42. A business absorbs its fixed overheads on the basis of machine hours. The
following figures are available for the month of June:
Budgeted fixed overhead $45,000
Budgeted machine hours 30,000
Actual fixed overhead $49,000
If there was an over-absorbed of overhead of $3,500, how many machine hours were
worked in the month?
a. 30,334
b.32,667
c. 35,000
d. 49,000
OAR = 45,000/30,000 = 1.5
Absorbed OH = 49,000 + 3,500 = 52,500
Machine hour = 52,500/1.5 = 35,000
2.43. Information relating to process F and G was as follows:
Process Normal loss (%) Input Output
F 8 65,000 58,900
G 5 37,500 35,700
For each process, was there an abnormal loss or abnormal gain?
Process Abnormal loss Abnormal gain
F
G

Process Normal loss Input Expected Actual output

output
F 8 65,000 59,800 58,900
G 5 37,500 35,625 35,700

2.44. A company’s operating costs are 60% variable and 40% fixed.
If the company switched from marginal costing to absorption costing, which of the
following variance’s value would change?
a. Variable OH efficiency variance
b. Sales volume variance
c. Fixed OH expenditure variance
d. Direct material variance
Sales volume variance
The sales volume variance would change as under marginal costing it is valued at
standard contribution, whereas under absorption costing it is valued at standard profit.
2.45. A company always determines its order quantity for a raw material by using the
economic order quantity (EOQ) model.
What would be the effects on the EOQ and the total annual holding cost of a decrease in
the cost of ordering a batch of raw material?
Higher Lower
EOQ
Annual holding cost

EOQ – Lower
Annual holding cost – Lower
The EOQ formula = √(2 x Co x D)/Ch
Where: Co = cost per order D = annual demand
Ch = cost of holding one unit in inventory
If the cost per order decreases then the numerator value of the EOQ will decrease, so the
EOQ will be lower.
If the EOQ is lower, then the amount of inventory held in stores will be lower, so the
total annual holding cost of inventory will fall also.
2.46. A company which operates a process costing system had work-in-progress at the
start of last month of 300 units (valued at $1,710) which were 60% complete in respect of
all costs. Last month a total of 2,000 units were completed and transferred to the finished
goods warehouse. The cost per equivalent unit for costs arising last month was $10. The
company uses the FIFO method of cost allocation.
What was the total value of the 2,000 units transferred to the finished goods warehouse
last month?
a. $20,000
b. $19,910
c. $21,710
d. $20,510
$19,910
Opening WIP + units started and finished = Output
300 units + 1,700 units (balancing figure) = 2,000 units
Finished output valuation:
Value brought forward in opening WIP 1,710
To complete Opening WIP 1,200 (300 x $10 x 40%)
Units started and finished 17,000 (1,700 x $10)
2.47. An organisation operates a piecework system of remuneration, but also guarantees its
employees 80% of a time-based rate of pay which is based on $20 per hour for an eight
hour working day. Three minutes is the standard time allowed per unit of output. Piecework
is paid at the rate of $18 per standard hour.
If an employee produces 200 units in eight hours on a particular day, what is the employee's
gross pay for that day?
$

180
Standard time for actual output of 200 units = 200 units x 3 minutes per unit = 600
minutes or 10 hours
Gross pay = 10 hours x $18 = $180
2.48. A company uses an overhead absorption rate (OAR) of $3.50 per machine hour,
based on 32,000 budgeted machine hours for the period. During the same period, the
actual total overhead expenditure amounted to $108,875 and 30,000 machine hours were
recorded on actual production.
By how much was the total overhead under or over absorbed for the period?
a. Under-absorbed by $7,000
b. Over-absorbed by $7,000
c. Under-absorbed by $3,875
d. Over-absorbed by $3,875
Under absorbed by $3,875
2
Absorbed overhead (actual hours x OAR) = 30,000 x $3.50
$105,000
Actual overhead $108,875
Under absorption $3,875
2.49. The purchase price of an inventory item is $25 per unit. In each three month period
the usage of the item is 20,000 units. The annual holding costs associated with one unit
equate to 6% of its purchase price. The cost of placing an order for the item is $20.
What is the economic order quantity for the inventory item (to the nearest whole unit)?

EOQ = √(2 x 20 x 80,000)/(25 x 0.06) = 1,461

2.50. The following budgeted information relates to a manufacturing company for next
period:
Units $

Production 14,000 Fixed production 63,000

costs

Sales 12,000 Fixed selling costs 12,000

The normal level of activity is 14,000 units per period. Using absorption costing the
profit for next period has been calculated as $36,000.
What would be the profit for next period using marginal costing?
$
27000
As production volume is greater than sales volume, there is a closing inventory of 2,000
units (14,000 - 12,000).
When inventory increases, profit under absorption costing is higher than profit under
marginal costing. Difference in profit = change in inventory x overhead absorption rate
(OAR) per unit = 2,000 units x ($63,000/14,000 units) = $9,000
Profit under marginal costing = $36,000 - $9,000 = $27,000
2.51. ACB Co gradually receives its re-supply of inventory at a rate of 10,000 units a week.
Other information is available as follows.
Weekly demand 5,000 units
Set-up costs for each production run $125
Weekly cost of holding one unit $0.0025
What is the economic production run?
a. 1,577 units
b. 7,071 units
c. 31,623 units
d. 894,427 units
Solutions

EBQ =
Ch(1 D R)

= 0.0025(1  5,000 10,000)

=31,623 units

2.52. The demand for a product is 12,500 units for a three month period. Each unit of
product has a purchase price of $15 and ordering costs are $20 per order placed. The
annual holding cost of one unit of product is 10% of its purchase price. What is the
Economic Order Quantity (to the nearest unit)?
a. 577
b. 816
c. 866
d. 1,155
Solutions
Co = 20
D = 12,500 × 4 = 50,000
CH = 10% × $15 = 1.50
EOQ = 1,155
2.53. A manufacturing company uses 25,000 components at an even rate during a year.
Each order placed with the supplier of the components is for 2,000 components, which is the
economic order quantity. The company holds a buffer inventory of 500 components. The
annual cost of holding one component in inventory is $2. What is the total annual cost of
holding inventory of the component?
a. $2,000
b. $2,500
c. $3,000
d. $4,000
Solutions
Annual holding cost = [buffer (safety) inventory + reorder level/2)] × holding cost per
unit = [500 + (2,000/2)] × $2 = $3,000
2.54. A company wishes to minimise its inventory costs. Order costs are $10 per order and
holding costs are $0.10 per unit per month. Fall Co estimates annual demand to be 5,400
units. What is the economic order quantity?
a. 949 units
b. 90,000 units
c. 1,039 units
d. 300 units
Solutions
CO = $10
D = 5,400 x 12 = 450 per month
Ch = $0.10
EOQ = 300 units
2.55. The following data relate to inventory item A452:
Average usage 100 units per day
Minimum usage 60 units per day
Maximum usage 130 units per day
Lead time 20-26 days
EOQ 4,000 units
What is the maximum inventory level?
a. 3,380 units
b. 6,180 units
c. 7,380 units
d. 8,580 units
Solutions
The maximum inventory level was 6,180 units
Reorder level= maximum usage x maximum lead time = 130 x 26 = 3,380 units
Maximum level= reorder level + reorder quantity – (minimum usage x minimum
lead time) = 3,380 + 4,000 – (60 x 20) = 6,180 units