Supply Chain/Reorder Point
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CPA Auditing and Attestation (AUD) › Supply Chain/Reorder Point
The amount of inventory that a company would tend to hold in safety stock would increase as the:
Length of time that goods are in transit decreases
Costs of running out of stock decreases
Variability of sales decreases
Cost of carrying inventory decreases
Explanation
The amount of inventory that a company would tend to hold in stock would increase as the cost of carrying inventory decreases.
When selecting suppliers before implementing a just-in-time (JIT) purchasing system, a company must take extreme care because a JIT purchasing system:
Relies on suppliers to deliver products when needed
Depends on a great number of highly motivated suppliers
Relies on competent suppliers, which eliminates the need for backflush costing
Shifts responsibility for order taking and fulfillment to the supplier
Explanation
JIT does not entail keeping a significant amount of inventory on hand. So, suppliers must be ready to provide products as soon as there is need.
Which of the following characteristics is a primary benefit of a just-in-time inventory system for raw materials?
Increases standard delivery quantity
Decreases deliveries required to maintain production
Eliminated non-value-added operations
Increases total number of suppliers to ensure competitive bidding
Explanation
JIT is designed to minimize the amount of time inventory is kept on hand before it is utilized. Thus, it eliminates non value added operations.
What amount of annual sales must a company achieve to break even if the following information is given: Fixed Costs per month \$2,500, Unit Selling Price \$100, Variable cost as a percentage of sales 60%
\$30,000
\$50,000
\$75,000
\$100,000
Explanation
\$2,500 * 12 months = \$30,000. 100% - 60% = 40% CM of sales. $30,000/40% = $75,000
Which one of the following represents methods for converting A/R to cash?
Trade discounts, collection agencies, and credit approval
Trade discounts, cash discounts, and electronic funds transfers
Cash discounts, collection agencies, and electronic funds transfers
Factoring, pledging, and electronic funds transfers
Explanation
These are methods for converting A/R to cash.
The reorder point for a firm is the point at which the firm should reorder more inventory and it is calculated as:
Safety stock + (Lead time * Sales during lead time)
Lead time + (Safety stock * orders)
Safety stock * lead time * orders
Safety stock * lead time + sales during lead time/sales per week
Explanation
The formula for reorder point needs to consider the amount of safety stock required by the firm, as well as the time it would take to acquire more inventory.