Question

1. Fixed costs generate

(a) cyclic stock.

(b) safety stock.

(c) anticipation stock.

(d) pipeline stock.

2. Uncertainties generate

(a) cyclic stock.

(b) safety stock.

(c) anticipation stock.

(d) pipeline stock.

3. known events generate

(a) cyclic stock.

(b) safety stock.

(c) anticipation stock.

(d) pipeline stock.

4. Work-in-progress generates

(a) cyclic stock.

(b) safety stock.

(c) anticipation stock.

(d) pipeline stock.

5. Products are being transported from a factory to a distribution center. They are

considered

(a) cyclic stock.

(b) safety stock.

(c) anticipation stock.

(d) pipeline stock.

6. A retailer purchased an item from a supplier. Which of the followings is NOT consid-

ered the cost of holding the item in inventory at the retailer?

1

(a) Cost of capital

(b) Price of the item the retailer paid to the supplier

(c) Insurance the retailer purchased for the item

(d) Warehousing cost

7. If a retailer uses his own cash to build inventory, the cost of capital on the inventory

is zero.

(a) True

(b) False

8. Suppose a company has two sources of funding: equities and loans from banks. If their

dollar values and their interest rates are given as follows, what interest rate should the

company use to compute the cost of capital for its inventory?

Source of Funding Dollar Value Annual Interest Rate

Equity $200 million 12%

Loans from banks $400 million 9%

Answer 1

Answer 1 (a) Cycle stock

Explanation- Fixed cost generate cycle stock. Because Cycle stock create due to economies of scale in replenishment.

Answer 2 (b) safety stock

Explanation- The more uncertainties the more we need to maintain safety stock.

Answer 3 (c) anticipation stock

Explanation - If we know something already we try to anticipate it. For e.g we know that in a particular season demand for our product will increase but the raw material will not be available in this season, so what we do is to already make an anticipate stock.

Answer 4 (d)

Explanation- work in progress generates pipeline stock (it is in transit or process not yet delivered or completed).

Answer 5 (d)

Explanation- The stock is in transit or not yet delivered is called as pipeline stock.

Answer 6 (a)

Explanation- cost of capital is the required rate of return on a portfolio company's existing securities.

Answer 7(a) True

Explanation- Cost of capital will cost to 0 because retailer is using his own money.

Answer 8 (9%)

Explanation- Value of loan not equity is considered.