B2-M4 Working Capital Management 1

Question 1

what is market ceiling or NRV?

Answer 1

SP - costs to complete and dispose

Question 2

what is market floor?

Answer 2

market ceiling - normal profit margin

Question 3

when do we use lower of cost or market and lower of cost or NRV?

Answer 3

• inventory costed using LIFO or retail inventory method is measured at the lower of cost or market value
• inventory costed using other methods is measured at lower of cost or NRV

Question 4

what happened if gross profit rate is overstated?

Answer 4

it will cause COGS understated and ending inventory to be overstated

Question 5

what are carrying costs?

Answer 5

• storage costs
• insurance costs
• opportunity costs of inventory investment
• lost inventory due to obsolescence or spoilage

Question 6

what factors determine safety stock?

Answer 6

• reliability of sales forecasts
• possibility of customer dissatisfaction resulting from back orders
• costs of running out of inventory (stock-out costs)
• Lead time (time elapses from the placement to the receipt of an order)
• seasonal demands on inventory

Question 7

what factors affect the optimal level of inventory?

Answer 7

• usage rate of inventory per period of time
• cost per unit of inventory
• cost of placing orders for inventory
• time required to receive inventory

Question 8

what is primary cost when the economic order quantity (EOQ) model is used for a firm that manufactures its own inventory?

Answer 8

production set-up