Chapter 21

What best describes working capital?
1. The difference between current assets and current liabilities
2. The cash required to run the business
3. The cash balance
4. The capital raised to finance operations.
What best describes overtrading?
1. Selling more than the stocks than are available
2. Where a business has expanded turnover to a level not supported by investment in working capital.
3. Having too many debtors
4. Not having enough cash to pay suppliers
A company has correctly determined its order quantity for a component using the basic economic order quantity (EOQ) model. Subsequently the cost of holding one unit of the component in stock for a year has fallen.

The effect of this reduction on the EOQ and total annual cost of ordering the Component is:
1. EOQ:Higher
  Total annual ordering cost: Higher
2. EOQ:Higher
  Total annual ordering cost: Lower
3. EOQ: Lower
  Total annual ordering cost: Lower
4. EOQ:Lower
  Total annual ordering cost: Higher
The following data relate to one particular product line of a retailing company.

Annual demand.........................90,000 units
Annual stockholding cost............£8 per unit
Estimated ordering costs............£25 per order

The company has been ordering the product from its supplier in batches of 750 units which is optimal based on the above data. However, it has been discovered now that the cost of placing an order has been £36 and not the £25 estimated. Using the new information the optimal order size has been correctly calculated as 900 units.

The annual cost to the company of ordering in batches of 750 instead of 900 units is:
1. £100
2. £120
3. £1,100
4. £1,200
Meyrick Ltd, a manufacturer of the finest cigars, made sales of £200,000 in January 200X, and these are expected to increase, on a cumulative basis, by 10% each month. The company achieves a gross profit of 30% on sales, and maintains stock levels sufficient to satisfy 10% of the following month’s demand. Creditors are paid two months after the month of purchase. What is the cash paid to creditors in April 200X.
1. £151,800
2. £152,460
3. £155,540
4. £150,200
A company determines its order quantity using the economic order quantity (EOQ) model. If the cost of ordering a batch of materials increases, how will this affect the economic order quantity (EOQ) and annual stockholding costs (SH)?
1. EOQ:Higher
  SH:Higher
2. EOQ:Higher
  SH:No Effect
3. EOQ:Lower
  SH:Lower
4. EOQ:Lower
  SH:No Effect
The EOQ model is used to minimise
1. cost associated with stockouts
2. inventory ordering costs
3. inventory holding costs
4. the sum of inventory ordering and holding costs
Which one of the following may be thought of as a stockholding cost?
1. Disruption of production schedules
2. Loss of customers goodwill
3. Shipping and handling costs
4. Stock obsolescence
In 201X receivables balance for Green Plc was £40,000 whilst sales of credit totalled £200,00. Assume 365 days in the year.What is, in terms of the number of days, the average credit period given by the company:
1. 65 days
2. 56 days
3. 73 days
4. 80 days
201X Burton Plc a manufacturing firm at the end of the year had a stock of £20,000 in monetary terms. Assume 365 days in the year. The cost of goods sold was £160,000. What is, in terms of days, the amount of finished stock in hand to the nearest day?
1. 46 days
2. 50 days
3. 38 days
4. 41 days