CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

MANAGEMENT ADVISORY SERVICES

QUANTITATIVE METHODS

THEORY

1. Order-filling costs, as opposed to order-getting costs, include all but which of the following
items?
a. Credit check of new customers. c. Collection of payments for sales orders.
b. Packing ad shipping of sales orders. d. Mailing catalogs to current customers.

2. Which condition justifies accepting a low inventory turnover ratio?

a. High carrying costs. c. Short inventory order lead times.
b. High stock-out costs. d. Low inventory order costs.

3. Which of the following inventory items would be the most frequently reviewed in an ABC
inventory control system?
a. Expensive, frequently used, high stock-out cost items with short lead times.
b. Expensive, frequently used, low stock-out cost items with long lead times.
c. Inexpensive, frequently used, high stock-out cost items with long lead time.
d. Expensive, frequently used, high stock-out cost items with long lead time.

4. In an ABC inventory analysis, the items that are most likely to be controlled with a red-line
system are the
a. A items. c. C items.
b. B items. d. items on a perpetual inventory.

5. The materials control method that is based on physical observation that an order point has
been reached is the:
A. cycle review method C. two-bin method
B. min-max method D. ABC plan

6. The underlying philosophy of “just-in-time” inventory system is that

a. The status of quantities on hand must be periodically reviewed where high-value items or
critical items are examined more frequently than low-cost or non-critical items.
b. It is a quest toward continuous improvement in the environmental conditions that
necessitates inventories.
c. The quantities of most stock items are subject to definable limits.
d. It is impractical to give equal attention to all stock items, hence the need to classify and
rank them according to their cost significance.

7. Companies that adopt just-in-time purchasing systems often experience

a. An increase in carrying costs.
b. A reduction in the number of suppliers.
c. Fewer deliveries from suppliers.
d. A greater need for inspection of goods as the goods arrive.

8. An inventory control system which employs mathematical models as an aid in making

inventory decision is known as
a. Order cycling system c. Statistical inventory control system.
b. Two-bin system d. Mini-max system

9. Which of the following is used in determining the economic order quantity (EOQ)?
a. Regression analysis. c. Markov process.

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b. Calculus. d. Queuing theory.

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10. In inventory management, the problem of avoiding excessive investment in inventories and
at the same time avoiding inventory shortages can be solved by applying a quantitative
technique known as
a. Payback analysis c. Economic order quantity
b. Probability analysis d. High-low point method

11. A characteristic of the basic economic order quantity (EOQ) model is that it
a. Is relatively insensitive to error.
b. Should not be used when carrying costs are large in relation to procurement costs.
c. Is used when product demand, lead-time, and ordering costs are uncertain.
d. Should not be used in conjunction with computerized perpetual inventory systems.

12. In the Economic Order Quantity (EOQ) model, some of the underlying assumptions are
a. Unlimited production capacity, declining demand, decreasing ordering cost, decreasing
carrying cost, and unlimited inventory capacity.
b. Constant demand, constant ordering cost, constant carrying cost, unlimited production
and inventory capacity.
c. Limited production capacity, declining demand, constant ordering cost, constant carrying
cost, and unlimited inventory capacity.
d. Increasing demand, limited production capacity, increasing ordering cost, increasing
carrying cost, and limited inventory capacity.

13. The economic order quantity formula can be used to determine the optimum size of
a. b. c. d.
Production run Yes Yes No No
Purchase order No Yes No Yes

14. The simple economic production lot size model will only apply to situations in which the
production
a. Rate equals the demand rate.
b. Rate is less than the demand rate.
c. Rate is greater than the demand rate.
d. For the period covered equals the projected sales for the period.

15. Which one of the following items is not directly reflected in the basic economic order
quantity (EOQ) model?
A. Interest on invested capital.
B. Inventory obsolescence.
C. Public warehouse rental charges.
D. Quantity discounts lost on inventory purchases.

16. The ______________ would not affect the economic order quantity.
a. company's weighted average cost of capital
b. cost of purchase requisition forms
c. cost of insuring inventory
d. cost of a stockout

17. The economic order quantity is not affected by the

a. estimate of the annual material consumption.
b. cost of insuring a unit of inventory for a year.
c. cost of purchase-order forms.
d. safety stock level

18. Various tools are employed to control large scale projects. They include all of the following
except:
A. PERT. C. Statistical process control.
B. CPM. D. Gantt charts.

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19. The ordering costs associated with inventory management include
a. Insurance costs, purchasing costs, shipping costs, and obsolescence.
b. Obsolescence, set up costs, quantity discounts lost, and storage costs.
c. Quantity discounts lost, storage costs, handling costs, and interest on capital invested.
d. Purchasing costs, shipping costs, set-up costs, and quantity discounts lost.

20. If one optimizes the inventory turnover ratio, which costs will not increase?
a. Total reorder costs c. Unit reorder costs
b. Stock-out cost d. Carrying costs

21. The carrying costs pertaining to inventory include

a. Insurance costs, incoming freight costs and storage costs.
b. Insurance costs, incoming freight costs and setup costs.
c. Setup costs and opportunity cost of capital invested in inventory.
d. Storage costs and opportunity cost of capital invested in inventory.

22. The optimal level of inventory is affected by all of the following except the
A. Usage rate of inventory per time period.
B. Cost per unit of inventory.
C. Current level of inventory.
D. Cost of placing an order for merchandise.

23. The optimal safety stock level is the quantity of safety stock that minimizes the
a. sum of the annual relevant stockout costs and carrying costs.
b. sum of the annual relevant ordering costs and carrying costs.
c. sum of the annual relevant ordering costs and stockout costs.
d. sum of the annual relevant ordering costs and purchasing costs.

24. When a specific level of safety stock is carried for an item in inventory, the average
inventory level for that item
a. Is not affected by the safety stock.
b. Increases by the amount of the safety stock.
c. Increases by one-half the amount of the safety stock.
d. Decreases by the amount of the safety stock.

25. For inventory management, ignoring safety stocks, which of the following is a valid
computation of the reorder point?
a. The economic order quantity.
b. The economic order quantity times the anticipated demand during the lead time.
c. The anticipated demand per day during lead time times lead time in days.
d. The square root of the anticipated demand during the lead time.

26. The cost of stock-out do not include

a. Depreciation and obsolescence. c. Loss of sales.
b. Loss of customer goodwill. d. Disruption of production schedules.

27. A change from the FIFO (first-in, first-out) inventory valuation method to the LIFO (last-in,
first-out) method would
A. Increase the EOQ in times of rising prices.
B. Decrease the EOQ in times of rising prices.
C. Increase the EOQ in times of falling prices.
D. Not affect the EOQ.

28. The process of adding resources to shorten selected activity times on the critical path in
project scheduling is called
A. Crashing. C. Material-requirements planning.
B. The Delphi technique. D. A branch-and-bound solution.

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29. The selling price of the product is relatively high and the purchase cost of the product is
relatively low. In this situation
a. Management must increase the price to cover the cost of carrying higher inventory.
b. The EOQ model will indicate frequent large orders.
c. The EOQ of the product is affected by the selling price.
d. The selling price has nothing to do with the EOQ of the product.

30. Clear View Co. manufactures various glass products including a car window. The setup cost
to produce the car window is $1,200. The cost to carry a window in inventory is $3 per year.
Annual demand for the car window is 12,000 units. If the annual demand for the car window
was to increase to 15,000 units,
a. the number of setups would decrease.
b. the total carrying costs would increase.
c. the economic order quantity would decline.
d. all of the above would occur.

31. The economic order quantity (EOQ) will rise following

a. A decrease in annual unit sales.
b. An increase in carrying costs.
c. An increase in the per unit purchase price of inventory.
d. An increase in the variable costs of placing and receiving an order.

32. Missile Company has correctly computed its economic order quantity as 500 units.
However, management feels it would rather order quantities of 600 units. How should
Missile’s total annual purchase-order costs and total annual carrying cost for an order
quantity of 600 units compare to the respective amounts for an order quantity of 500 units?
a. Higher purchase-order cost and lower carrying cost.
b. Higher purchase-order cost and higher carrying cost.
c. Lower purchase-order cost and higher carrying cost.
d. Lower purchase-order cost and lower carrying cost.

33. A decrease in inventory order costs will

a. Increase the reorder point.
b. Decrease the economic order quantity.
c. Have no effect on the economic order quantity.
d. Decrease the holding cost percentage.

34. An increase in inventory holding costs will

a. Decrease the economic order quantity.
b. Have no effect on the economic order quantity.
c. Increase the economic order quantity.
d. Decrease the number of orders issued per year.

35. For its economic order quantity model, a company has a $10 cost of placing an order and a
$2 annual cost of carrying one unit in stock. If the cost of placing an order increases by 20%,
the annual cost of carrying one unit in stock increases by 25%, and all other considerations
remain constant, the economic order quantity will:
A. decrease
B. increase
C. remain unchanged
D. either increase or decrease, depending on the reorder point
E. either increase or decrease, depending on the safety stock

36. A quantitative technique used for selecting the combination of resources that maximize
profits or minimize costs is
a. Curvilenear analysis c. Dynamic programming
b. Queuing theory d. Linear programming

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37. For a 300-day work year Kulasa Corp. consumes 420,000 units of an inventory item. The
usual lead-time for the inventory item is six (6) days; however, at times, the lead-time has
gone as high as eight (8) days. Kulasa now desires to adjust its safety stock policy. The
likely effect on stockout costs and carrying costs, respectively, would be
a. Increase and decrease. c. Increase and increase.
b. Decrease and decrease. d. Decrease and increase.

38. Which of the following terms is not used in project management?

a. Dummy activity. c. Optimistic time.
b. Latest finish. d. Lumpy demand.

39. A management consultant is scheduling a long-term research and development project. The
time table is very tight due to the advent of the rainy season and to inadequate research and
development staff complement. As the requirements are extensive and complex, what is the
most appropriate approach for planning and controlling the government highway project?
a. Time-series or trend regression analysis.
b. Cost-volume-profit analysis.
c. Queuing theory analysis.
d. Program evaluation review technique (PERT)

40. Which of the following statements is the least pertinent to the Project Evaluation Review
Technique (PERT)
a. It is a system, which uses network analysis and critical path methods.
b. It is more useful for analyzing the interrelationships of time and activities to discover
potential bottlenecks.
c. It involves measuring progress in relation to schedule, evaluating changes to schedule,
forecasting future progress and predicting and controlling costs.
d. Time is a primary consideration and this technique is particularly suite for problems,
which involve the combination of resources that maximize profits or minimize costs.

41. Which one of the following statements best describes a difference between basic PERT and
the Critical Path Method (CPM) of network analysis?
a. PERT uses probability distribution on the activity times while CPM uses point estimates
for the activity times.
b. PERT does not allow for slack times on the activities while CPM does.
c. PERT considers only activity cost while CPM considers only activity time.
d. PERT determines the least-cost path through a network while CPM determines the least-
time path through a network.

42. When using the PERT method for network analysis, the critical path through the network is
a. The longest path through the network. c. The path with the most slack.
b. The shortest path through the network. d. The least cost path.

43. In a Program Evaluation and Review Technique (PERT) system, activities along the critical
path:
A. intersect at a corner point described by the feasible area
B. may be delayed without affecting completion time
C. follow the line of best fit
D. have a slack of zero

44. Of these statements, which is the least pertinent to the concept of “slack” in relation to the
Project Evaluation and Review Technique (PERT)?
a. The less the amount of slack time, the more critical an activity or path.
b. Slack time information is useful for planning and continuous monitoring.
c. It is computed by subtracting the earliest expected time from the earliest allowable time.
d. If not exceeded, non-critical activities can be delayed without delaying the project’s
completion time.

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45. Which formula describes the learning curve?
a. y = axb c. y = ax-b
b
b. y = a x d. x = ayb

46. The calculation of reasonable probabilities about the future, based on the analysis of all the
latest relevant information by tested and logically sound statistical and economic techniques,
and applied in terms of an executive’s personal judgement and knowledge of his business is
a. Business forecasting c. Project feasibility studies
b. Budgeting d. Planning and control

47. Linear programming is used most commonly to determine the

a. Fastest timing.
b. Best use of scarce resources.
c. Most advantageous prices.
d. Mix of variables that will result in the largest quantity.

48. AB Woods Co. is planning to expand its production facilities, which is at present, a
constraint. You are asked to review the linear programming model. Among the items in the
model, which will not be found?
a. Constraints. c. Independent and dependent variables.
b. Slack variables. d. Networks.

49. In a linear programming maximization problem for business problem solving, the coefficient
of the objective function usually are
a. Usage rates for scarce resources.
b. Profit based on allocations of overhead and all indirect costs.
c. Variable costs.
d. Marginal contributions per unit.

50. Linear programming models are mathematical techniques in which an objective function is
maximized or minimized subject to constraints. These constraints must be fully specified
before a linear programming problem can be solved, and generally described:
a. Costs. c. Inefficiencies.
b. Resources. d. Dependent variables.

Questions 51 through 53 are based on the following information.

ReMetal, Inc. uses the following model to determine blends of new (n) metal and scrap (s) metal.
Max Z = $30N + $70S
subject to:
3N + 2S < 15
2N + 4S < 18

51. These mathematical functions are an example of a(n)

A. Parametric model. C. Economic order quantity model.
B. Present value model. D. Linear programming model.

52. The two inequality functions are

A. Constraints. C. Conditions.
B. Objectives. D. Shadow prices.

53. The point where N = 2 and S = 3 would

A. Be the optimal solution point. C. Lie in a corner.
B. Be a feasible point. D. Minimize cost.

54. A transportation model is a special case of

a. Dynamic programming model. c. Linear programming model.
b. PERT/CPM. d. Economic order quantity model.

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PROBLEMS
1. A&B Co.’s financial plan for next year shows sales of P72 million and cost of sales of P45
million. It expects short term interest rates to average 10% for the coming year. It aims to
increase inventory turnover from the present level of 9 times to 12 times next year. If its
plans and objectives would be carried out, how much is the cost savings for the coming year?
a. P125,000 b. P300,000c. P375,000 d. P500,000

2. The following information are given:

Optimal production run in units 2,000
Average inventory in units 1,000
Number of production runs 5
Cost per unit produced P75
Desired annual return on inventory investment 18%
Set-up costs per production run P5,000
If the units will be required evenly throughout the year, the total annual relevant costs using
the economic-order-quantity approach is
a. P5,000 b. P75,000 c. P38,500 d. P150,000

3. A company has estimated its economic order quantity for Part A at 2,400 units for the coming
year. If ordering costs are $200 and carrying costs are $0.50 per unit per year, what is the
estimated total annual usage?
a. 6,000 units b. 28,800 units c. 7,200 units d. 2,400 units

4. The following data refer to various annual costs relating to the inventory of a single-product
company:
Unit transportation-in on purchases $0.20
Storage per unit 0.12
Insurance per unit 0.10
Annual interest foregone from alternate investment of funds $800
Annual number of units required 10,000
What is the annual carrying cost per unit?
A. $0.30 B. $0.42 C. $0.50 D. $0.32

5. Phonic Goods is a distributor of videotapes. Tape-Disk Mart is a local retail outlet which sells
blank and recorded videos. Tape-Disk Mart purchases tapes from Phonic Goods at $3.00 per
tape; tapes are shipped in packages of 20. Phonic Goods pays all incoming freight, and Tape-
Disk Mart does not inspect the tapes due to Phonic Goods' reputation for high quality. Annual
demand is 104,000 tapes at a rate of 4,000 tapes per week. Tape-Disk Mart earns 20% on its
cash investments. The purchase-order lead time is two weeks. The following cost data are
available:
Relevant ordering costs per purchase order $90.50
Carrying costs per package per year:
Relevant insurance, materials handling, breakage, etc., per year $ 4.50
What is the required annual return on investment per package?
a. $60.00 b. $2.50 c. $12.00 d. $0.60

6. One of the products that Nature Way Health Products sells is a magnetic back support. The ordering cost
related to this product is P12.50 per order. The cost of carrying one item of inventory for one year is P16.00.
The business sells 40,000 of this type of product evenly throughout the year. How much is the total ordering
costs per year and the total carrying costs per year at the economic order quantity?
a. b. c. d.
Ordering costs P1,562.50 P1,562.50 P2,000.00 P4,000.00
Carrying costs P1,562.50 P2,560.00 P2,000.00 P4,000.00

7. For Raw Material B, a company maintains a safety stock of 5,000 pounds. Its average
inventory (taking into account the safety stock) is 8,000 pounds. What is the apparent order
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 quantity?
a. 16,000 lbs. b. 6,000 lbs. c. 10,000 lbs. d. 21,000 lbs

8. An organization has an inventory order quantity of 10,000 units and a safety stock of 2,000
units. The cost per unit of inventory is $5, and the carrying cost is 10% of the average value
of inventory. The annual inventory carrying cost for the organization is
A. $3,000 B. $3,500 C. $5,000 D. $6,000

9. R Corp.'s order quantity for Material T is 5,000 lbs. If the company maintains a safety stock
of T at 500 lbs., and its order point is 1,500 lbs., what would be the total annual carrying
costs assuming the carrying cost per unit is $0.20?
a. $1,000 b. $600 c. $100 d. $1,100

10. DF Tires Unlimited is a business enterprise located in the city of Cagayan de Oro. The
market price per unit is P3,000. Since Cagayan de Oro is a very progressive rural place, the
business sells an average of 36,000 tires annually. Based on a company study covering the
last five years of its operation, it was found out that annual carrying cost per tire is P5.00 and
the ordering cost is P100 per order. The store is open 7 days a week (which includes Sundays
and holidays). The delivery time per order (tires are ordered from Manila) is 5 days. Since it
normally takes time before an order is placed, filled up and delivered, the manager has
decided to keep a safety stock of 3,000 tires which is equivalent to a month’s sales. The
average inventory is
a. 3,493 tires b. 3,600 tires c. 1,200 tires d. 3,000 tires

11. R Corp.'s order quantity for Material T is 5,000 lbs. If the company maintains a safety stock
of T at 500 lbs., and its order point is 1,500 lbs., what is the lead time assuming daily usage is
50 lbs.?
a. 30 days b. 100 days c. 10 days d. 20 days

12. Information regarding the usage of material Y which shall be required evenly throughout the
year by GAC Company
Annual usage in units 30,000
Working days per year 250
Safety stock in units 1,200
Normal lead time in working days 25
The re-order point is
a. 6,250 b. 5,700 c. 4,200 d. 3,000

13. M&L Co. has the following information on inventory:

Sales 20,000 units per year
Order quantity 4,000 units
Safety stock 2,600 units
Lead time 4 weeks
What is the re-order point? (For calculation purposes, use 50-week year)
a. 4,200 units. b. 5,600 units. c. 2,600 units. d. 1,600 units

14. The China Tee Store sells 100,000 tea bags a year. Additional data are presented below:
Selling price per bag P2.50
Purchase cost per bag P1.50
Ordering cost per order P5.40
Carrying cost 20% of unit cost
Number of days the company operates in a year 250
Average lead time on purchases 6 days
What is the reorder point if the company will keep a 10-day safety stock of inventory?
a. 2,400 bags b. 5,400 bags c. 6,400 bags d. 8,800 bags

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15. JASMIN Products, Inc. gathered the following information related to one of its materials:
Order quantity 1,500 units
Normal use per day 500 units
Maximum use per day 600 units
Minimum use per day 100 units
If the lead time is five days, the order point is
a. 500 units b. 1,500 units c. 2,500 units d. 3,000 units

16. Inventory data for a certain raw material is as follows:

Annual usage in units 25,000
Working days per year 250
Normal lead time in working days 30
Maximum lead time in working days 50
Assuming that this raw material will be required evenly throughout the year, the order
point will be
a. 3,000 b. 4,000 c. 5,000 d. 8,000

17. A softdrinks distributor which buys in a pre-sell basis, is discussing with the route salesmen
on the proper cases to be ordered and the frequency of call. From the route book and other
records, the following are available: prior year’s purchases, 50,000 cases; carrying cost per
case of inventory, P1.20; distributor’s discount, 1 case for every 10 cases bought; cost of
placing an order, P3.00; weekly demand is approximately 962 cases. Safety stock required is
140 cases. No change in demand is expected this year. (Use a 365-day, 52-week year).
Determine the economic order quantity (EOQ), and the reorder point assuming a two-day lead-time.
a. b. c. d.
EOQ 481 cases 500 cases 962 cases 250 cases
Reorder point 500 cases 414 cases 275 cases 280 cases

18. Each stockout of Product AX sold by Axiom Inc. costs P87,500 per occurrence. The carrying cost per unit of
inventory is P250 per year, and the company orders 1,500 units of product 24 times a year at a cost of P5,000
per order. The probability of stockout at various levels of safety stock is
Units of Safety Stock Probability of a stockout
0 0.50
100 0.30
200 0.14
300 0.05
400 0.01
The optimal safety stock level for the company is
a. 0 units. c. 400 units.
b. 100 units. d. 300 units.

19. Vera Cruz Corporation seeks to determine the quantity of safety stock for product ST that
they should maintain that will result in the lowest cost to the company. Each stockout will
cost P600 and the carrying cost of each unit of safety stock will be P8. Product ST will be
ordered five times a year. Which of the following will produce the lowest cost?
a. A safety stock of 15 units which is associated with a 35% probability of running out of
stock during an order period.
b. A safety stock of 25 units which is associated with a 25% probability of running out of
stock during an order period.
c. A safety stock of 35 units which is associated with a 10% probability of running out of
stock during an order period.
d. A safety stock of 75 units associated with a 5% probability of running out of stock during
an order period.

20. If Ferry Company has a safety stock of 160 units and the average daily demand is 20 units,
how many days can be covered if the shipment from the supplier is delayed by 12 days?
a. 12.0 days b. 10.0 days c. 8.0 days d. 6.7 days
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21. D&R Corp. consumes 300,000 units of spare part V per year. The average purchase lead
time is 20 working days while the maximum is 27 working days. The company’s annual
operations cover 240 days allowing for shutdowns for plant maintenance, holidays and
Sundays. The company would like to keep safety stock or extra stock to guard against stock-
outs. How much is the safety stock?
a. 25,000 units. b. 1,250 units. c. 33,750 units. d. 8,750 units.

22. Arnold Enterprises uses the EOQ model for inventory control. The company has an annual demand of 50,000
units for part number 101 and has computed an optimal lot size of 6,250 units. Per-unit carrying costs and
stockout costs are $13 and $3, respectively. The following data have been gathered in an attempt to determine
an appropriate safety stock level:
Units Short Because of Excess Number of Times Short
Demand during the Lead Time Period in the last 40 Reorder Cycles
200 6
300 12
400 6
The annual cost of establishing a 200-unit safety stock is expected to be
a. $2,600 b. $4,040 c. $4,260 d. $5,200

23. Penguin Company manufactures winter jackets. Setup costs are $2.00. Penguin
manufactures 4,000 jackets evenly throughout the year. Using the economic order quantity
approach, the optimal production run would be 200 when the cost of carrying one jacket in
inventory for one year is:
A. $0.10 B. $0.20 C. $0.40 D. $0.05

24. Marita works for a local ceramics company. She just completed her accountancy degree and
learned the EOQ model in one of her subjects. She suggested to her employer to adopt it.
The company sells 20,000 pieces of specialty ceramic items each year. Traditionally, they
have produced these items four times a year, making 5,000 pieces at a time. They carry no
safety stock as customers do not mind waiting for orders. The average piece of ceramic
items costs P400 to make and costs the company P20 to carry in inventory for a year. The set
up costs for each production run total P80. The company should
a. Adopt EOQ due to savings of P35,675.
b. Continue the existing system due to P38,950 advantage.
c. Adopt EOQ due to savings of P42,320.
d. Continue the existing system due to P41,820 advantage.

25. RODENSTOCK, INC. currently places orders for a particular stock item at quarterly
intervals. Information concerning this item is as follows:
Cost of placing an order P10
Annual demand 20,000 units
Purchasing price per unit P0.50
The cost of holding the stock items amounts to 20% of the stock value per annum.
What annual cost saving would result if RODENSTOCK used the economic order quantity
for order sizes instead of their current policy?
a. P 80 b. P 90 c. P150 d. P240

26. A company annually consumes 10,000 units of Part C. The carrying cost of this part is $2 per
year and the ordering costs are $100. The company uses an order quantity of 500 units. By
how much could the company reduce its total costs if it purchased the economic order
quantity instead of 500 units?
a. $500 b. $2,000 c. $2,500 d. $0

27. The economic order quantity is the size of the order that minimizes total inventory costs,
including ordering and carrying costs. If the annual demand decreases by 36%, the optimal
order size will
A. Decrease by 20%. B. Increase by 20%. C. Increase by 6%. D. Decrease by 6%.
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28. As a consequence of finding a more dependable supplier, Dee Co. reduced its safety stock of
raw materials by 80%. What is the effect of this safety stock reduction on Dee’s economic
order quantity.
a. 80% decrease. b. 64% decrease. c. 20% increase. d. No effect.

29. Scholas Co. uses 840,000 units of component R4 in manufacturing R444 over a 300-day
work year. The usual lead time for the part is six days. However, at times, the lead time has
gone as high as eight days. Scholas now desires to adjust its safety stock policy. The
increase in safety stock size is
a. 16,800 units. b. 2,800 units. c. 7,200 units. d. 5,600 units.

30. Rusty, the night manager at a local fast food restaurant, has had problems with his employees
not arriving on time. After doing some research, he discovered that, if his employees were on
time the night before, the probability that they would arrive on time again is .7. On the other
hand, if they were late the night before, the probability that they would arrive on time the
following day is .4. What is the probability that an employee will arrive on time the fourth
day if they arrived on time the first day?
A. .575 B. .583 C. .61 D. .7

31. The Sigma Company wants more information on the demand for its products. The following
data are relevant
Units demanded Probability of unit demand Total cost of units demanded
0 0.10 P0.00
1 0.15 1.00
2 0.20 2.00
3 0.40 3.00
4 0.10 4.00
5 0.05 5.00
What is the total expected value of the total cost of units demanded?
a. P2.40 b. P9.15 c. P9.00 d. P7.40

32. Sampaguita Company is planning to market a new product. The marketing research staff prepared the following
payoff probability distribution giving the relative likelihood of monthly sales volume levels and the corresponding
income (loss) for the new product;
Monthly sales volume Probability Income(loss)
2,500 0.10 P(25,000)
5,000 0.20 7,500
10,000 0.50 37,500
15,000 0.10 50,000
25,000 0.10 75,000
The expected value of the monthly income from the new product:
a. P18,750 b. P22,500 c. P30,250 d. P32,750

33. Dough Distributors has decided to increase its daily muffin purchases by 100 boxes. A box
of muffins costs $2 and sells for $3 through regular stores. Any boxes not sold through
regular stores are sold through Dough’s thrift store for $1. Dough assigns the following
probabilities to selling additional boxes:
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 Additional sales Probability
60 0.6
100 0.4

What is the expected value of Dough’s decision to buy 100 additional boxes of muffins?
a. $28 b. $40 c. $52 d. $68

34. The auditor is attempting to evaluate the potential dollar effect of a control breakdown in the
sales cycle. Two controls are involved. The probability that control A will fail is 10%, and the
probability that control B will fail is 5%. The controls are independent such that the failure of
one does not affect the failure of the other. In evaluating the potential exposure to the
organization, the auditor determines that the cost of control A's failure is $10,000, the cost of
control B's failure is $25,000, and the cost of failure of both control procedures at the same
time is an additional $200,000. If the control procedures are not made more effective, the
expected cost to the organization is
A. $1,000 B. $32,250 C. $2,250 D. $3,250

35. In actual business, it is difficult to ascertain the value of information about a future event.
However, it is possible to compute the maximum expected value of additional information by
computing the expected value under conditions of certainty and comparing it with the
expected value of the best strategy under uncertainty. Assuming:
Expected value under certainty conditions P12,000
Expected value using best strategy under uncertainty 10,900
Expected value of perfect information 1,100
This means
a. Management is uncertain it will incur P10,900.
b. Management is certain it will realize P12,000
c. Management can afford to spendP1,100 for perfect information.
d. Management can afford to incur P10,900 since it will earn a net income of P1,100.

36. Under favorable weather conditions, the management of Flesher Farms expects its raspberry
crop to have a $120,000 market value. An unprotected crop subject to frost has an expected
market value of $80,000. If Flesher protects the raspberries against frost, the market value of
the crop is still expected to be $120,000 under frost-free conditions and $180,000 if a frost
occurs. What must be the probability of a frost for Flesher to be indifferent to spending
$20,000 for tents to provide frost protection?
a. 0.167 b. 0.200 c. 0.250 d. 0.333

37. Ron Bagley is contemplating whether to investigate a labor efficiency variance in the
Assembly Department. It will cost $6,000 to undertake the investigation and another
$18,000 to correct operations if the department is found to be operating improperly. If the
department is operating improperly and Bagley fails to investigate, operating costs from the
various inefficiencies are expected to amount to $33,000. Bagley will be indifferent between
investigating and not investigating the variance if the probability of improper operation is
a. 0.29 b. 0.40 c. 0.60 d. 0.71

Questions 38 and 39 are based on the following information.

A company has the following probabilities of profit (or loss) from an investment opportunity:
Profit Outlook Profit (Loss) Amount Probability
Optimistic $10,000 .30
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 Most likely 6,000 .55
Pessimistic (1,000) .15

38. What is the expected profit?

A. $6,000 B. $6,150 C. $6,300 D. $6,450

39. How much would the company be willing to pay before investing in the project to learn in
advance which of the three scenarios (optimistic, pessimistic, or most likely) would actually
occur?
A. $0 B. $150 C. $300 D. $550

Questions 40 and 41 are based on the following information:

Superior Craft is evaluating the launching of a new product. If the product becomes successful,
the present value of future cash flows (excluding investment) is estimated at P2,000,000. If the
product is not successful, the present value of this flow is estimated at P400,000. The required
investment is P1,000,000.
40. What are the probabilities that would have to be assigned to the events “success” and “not
success” to make Superior Craft indifferent between the two actions “invest” and “do not
invest”?
a. b. c. d.
Probability of success 37.5% 40% 45.5% 50%
Probability of not success 62.5% 60% 54.5% 50%

42. If Superior Craft thinks the probability of “success” is 60%, how much higher would be the
expected value of the act “invest” over the expected value of the act “do not invest”?
a. P360,000 b. P400,000 c. P600,000 d. P1,000,000

43. Colfax Creations produces three products: A, B, and C. Four machines are used to produce
the products. The sales demands and time on each machine (in minutes) is as follows:
Demand Time on M1 Time on M2 Time on M3 Time on M4
A 100 10 15 10 5
B 80 10 5 10 5
C 60 5 5 15 15
There are 2,400 minutes available on each machine during the week. Which machine is the
bottleneck?
a. M1 b. M2 c. M3 d. M4

44. Phil-Fuji Co. manufactures two types of electronic components, both of which must pass
through the Assembly and Finishing Departments. The following constraints apply:
Unit Contribution Hrs Required per unit
Product Selling Price Margin per Unit Assembly Finishing
Component 818 P120 P30 3 4
Component 810 P180 P45 4 6
Demand for Component 818 far exceeds the company’s capacity, but the company can only
sell 60 units of component 810 each week. Workers in the Assembly department work a total
of 200 hours per week, and workers in the Finishing department work a total of 250 hours per
week. The company wants to know how many units of each component to produce to
maximize profit. If X represents the number of units of Component 818 and Y represents the
number of units of Component 810, the objective function would be
a. Maximize 120X + 180Y c. Minimize 90X + 135Y
b. Maximize 30X + 45Y d. Minimize 30X + 45Y RPCPA 0595

45. A mathematical technique that can be used to find the best possible combination of the
company’s limited resources is called linear programming. Star Electronics manufactures
two types of calculators, Star 1 and Star 2. Each calculator is processed in two departments,
departments 1 and 2. Daily labor requirements are as follows:

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 Hours Required per Calculator Total Hours
Department Star 1 Star 2 Available
1 15 5 450
2 18 9 720
The marginal contributions are P15 on Star 1 and P0.10 on Star 2. From the items listed
below what are the labor constraints? (Assume X represents the number of units of Star 1, Y
represents the number of units of Star 2, P represents profit).
a. X > 0 ; Y > 0 c. 15X + 5Y < 450; 18X + 9Y < 720
b. P = 15X + 10Y; P = 15X + 5Y d. combination of (b) and (c)

46. Consider the following linear programming problem and assume that non-negativity
constraints apply to the independent variables:
Max CM = $14X + $23Y
Subject to
Constraint 1: 4X + 5Y < 3,200
Constraint 2: 2X + 6Y < 2,400
Which of the following are feasible solutions to the linear programming problem?
a. X = 600, Y = 240 c. X = 0, Y = 400
b. X = 800, Y = 640 d. X = 1,200, Y = 0

47. The Katangalan Company makes toys Y and Z each of which needs two processes, cutting and sanding. The
contribution margin is P3.00 for product Y and P4.00 for product Z. The table below shows the maximum
number of units (constraints) of each product that may be processed in the two departments.
Maximum Capacities (in Product Units)
Product Cutting Sanding
Y 30 40
Z 30 20
Considering the constraint on processing, which combination of product Y and Z maximizes the total contribution
margin?
A. B. C. D.
Product Y 20 units 30 units 40 units 0 units
Product Z 10 units 0 units 0 units 20 units

Questions 48 and 49 are based on the following information.

D Company has available production capacity of 180,000 hours. This can be used to produce 3
products in any combination. Total fixed cost is P180,000, other facts are:
PRODUCTS
X Y Z
Selling price P 8 P 23 P 5
Variable cost 7 12 2
No. of hours per 1 hr. 10 hrs. 2 hrs.
unit
Market limits 5,000 50,000

48. The best possible combination of product is:

a. b. c. d.
Product X 30,000 4,000 30,000 80,000
Product Y 5,000 4,000 3,000 0
Product Z 50,000 50,000 50,000 50,000

49. The net profit associated with the best combination of products is:
a. P55,000 b. P54,000 c. P50,000 d. P33,000

Questions 50 through 52 are based on the following information.

In the two following constraint equations, X and Y represent two products (in units) produced by
the Generic Co.
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 Constraint 1: 3X + 5Y < 4,200
Constraint 2: 5X + 2Y > 3,000
50. What is the maximum number of units of Product X that can be produced?
a. 4,200 b. 3,000 c. 600 d. 1,400

51. What is the feasible range for the production of Y?

a. 840 to 1,500 units b. 0 to 840 units c. 0 to 631 units d. 0 to 1500 units

52. A solution of X = 500 and Y = 600 would violate

a. Constraint 1. b. Constraint 2. c. both constraints. d. neither constraint.

53. If plant capacity for cutting time and shaping time is 80 hours and 100 hours, respectively,
and it takes four hours to cut and two hours to shape a standard model and two hours to cut
and five hours to shape a deluxe model, the maximum number of standard and deluxe models
that can be produced are:
A. 50 standard and 40 deluxe D. 20 standard and 20 deluxe
B. 20 standard and 40 deluxe E. 20 standard and 50 deluxe
C. 40 standard and 20 deluxe

54. The following information applies to a project:

Activity Time (days) Immediate Predecessor
A 5 None
B 3 None
C 4 A
D 2 B
E 6 C, D
The earliest completion time for the project is
A. 11 days. B. 14 days. C. 15 days. D. 20 days.

55. Hennepin Co. used 30 hours to produce the first batch of units. The second batch took an
additional 18 hours. How many total hours will the first four batches require?
a. 76.8 hours. b. 96.2 hours. c. 120.0 hours. d. 61.44 hours.

56. Lake Corporation manufactures specialty components for the electronics industry in a highly
labor intensive environment. Are Electronics has asked Lake to bid on a component that
Lake made for Arc last month. The previous order was for 80 units and required 120 hours
of direct labor to manufacture. Arc would now like 240 additional components. Lake
experiences an 80% learning curve on all of its jobs. The number of direct labor hours
needed for Lake to complete the 240 additional components is
a. 360.0 b. 187.2 c. 307.2 d. 256.0

57. Tofte has a target total labor cost of $1,500 for the first four batches of a product. Labor is
paid $10 an hour. If Tofte expects an 80% learning rate, how many hours should the first
batch take?
a. 150 hours. b. 58.6 hours. c. 96.0 hours. d. 73.2 hours.

58. CBA Company expects a 90% learning curve. The first batch of a new product required 100
hours. The second batch should take
a. 100 hours. b. 90 hours. c. 80 hours. d. 95 hours

Questions 59 through 63 are based on the following information.

The College Honor Society sells hot pretzels at the home football games. The pretzels are sold
for $1.00 each, and the cost per pretzel is $0.30. Any unsold pretzels are discarded because they
will be stale before the next home game.
The frequency distribution of the demand for pretzels per game is presented below.
Unit Sales Volume Probability
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 2,000 pretzels .10
3,000 pretzels .15
4,000 pretzels .20
5,000 pretzels .35
6,000 pretzels .20
59. The estimated demand for pretzels at the next home football game using an expected value
approach is
a. 4,000 pretzels. b. 4,400 pretzels. c. 5,000 pretzels. d. 6,000 pretzels.

60. The estimated demand for pretzels at the next home football game using a determinate
approach based on the most likely outcome is
a. 4,000 pretzels. b. 4,400 pretzels. c. 5,000 pretzels. d. 6,000 pretzels.

61. The conditional profit per game of having 4,000 pretzels available but only selling 3,000
pretzels is
a. $1,800 b. $2,100 c. $2,800 d. $3,500

62. The conditional profit per game of having 4,000 pretzels available and selling all 4,000
pretzels is
a. $1,200 b. $2,100 c. $2,800 d. $800

63. The conditional profit (loss) per game of having 4,000 pretzels available but being able to
sell 5,000 pretzels if they had been available is
A. $2,800. B. $(1,225). C. $4,025. D. $3,500.

Questions 64 through 68 are based on the following information.

Gleason Co. has two products, a frozen dessert and ready-to-bake breakfast rolls, ready for introduction. However,
plant capacity is limited, and only one product can be introduced at present. Therefore, Gleason has conducted a
market study, at a cost of $26,000, to determine which product will be more profitable. The results of the study
follow.
Sales of Desserts at $1.80/unit Sales of Rolls at $1.20/unit
Volume Probability Volume Probability
250,000 .30 200,000 .20
300,000 .40 250,000 .50
350,000 .20 300,000 .20
400,000 .10 350,000 .10
The costs associated with the two products have been estimated by Gleason's cost accounting
department and are shown as follows.
Dessert Rolls
Ingredients per unit $.40 $.25
Direct labor per unit .35 .30
Variable overhead per .40 .20
unit
Production tooling* 48,000 25,000
Advertising 30,000 20,000
*Gleason treats production tooling as a current operating expense rather than capitalizing it as a
fixed asset.
64. According to Gleason's market study, the expected value of the sales volume of the breakfast
rolls is
A. 125,000 units. C. 275,000 units.
B. 260,000 units. D. Some amount other than those given.
65. Applying a deterministic approach, Gleason's revenue from sales of frozen desserts would be
A. $549,000. C. $216,000.
B. $540,000. D. Some amount other than those given.

66. The expected value of Gleason's operating profit directly traceable to the sale of frozen
desserts is
A. $198,250. C. $120,250.
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 B. $150,250. D. Some amount other than those given.

67. In order to recover the costs of production tooling and advertising for the breakfast rolls,
Gleason's sales of the breakfast rolls would have to be
A. 37,500 units. C. 60,000 units.
B. 100,000 units. D. Some amount other than those given.

68. The advertising expense estimated by Gleason for the introduction of the new products is an
example of a(n)
A. Conversion cost. C. Committed cost.
B. Discretionary cost. D. Opportunity cost.

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ANSWER KEY
Theory
1. D 11. A 21. D 31. D 41. A 51. D
2. B 12. B 22. C 32. C 42. A 52. A
3. D 13. B 23. A 33. B 43. D 53. B
4. C 14. C 24. B 34. A 44. C 54. C
5. C 15. D 25. C 35. A 45. A
6. B 16. D 26. A 36. D 46. A
7. B 17. D 27. D 37. D 47. B
8. C 18. C 28. A 38. D 48. D
9. B 19. D 29. D 39. D 49. A
10. C 20. D 30. B 40. C 50. B

Problems
1. A 11. D 21. D 31. A 41. A 51. B 61. A
2. C 12. C 22. B 32. C 42. A 52. A 62. C
3. C 13. A 23. C 33. C 43. C 53. D 63. A
4. A 14. C 24. C 34. D 44. B 54. C 64. B
5. C 15. D 25. B 35. C 45. C 55. A 65. B
6. C 16. C 26. A 36. B 46. C 56. B 66. C
7. B 17. B 27. A 37. B 47. A 57. B 67. B
8. B 18. C 28. D 38. B 48. A 58. C 68. B
9. B 19. C 29. D 39. B 49. A 59. B
10. B 20. C 30. B 40. A 50. D 60. C

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