Select the correct one from the following:

1. Which of the following would cause average inventory holdings to decrease, other things held constant?

a. The purchase price of inventory items decreases by 50 percent.

b. The carrying price of an item decreases (as a percent of purchase price).

c. The sales forecast is revised downward by 10 percent.

d. Interest rates fall.

e. Fixed order costs double.

2. Halliday Inc. receives a $2 million payment once a year. Of this amount, $600,000 is needed for cash payments made during the next year. Each time Halliday deposits money in its account, a charge of $2.00 is assessed to cover clerical costs. If Halliday can hold marketable securities that yield 5 percent, and then convert these securities to cash at a cost of only the $2 deposit charge, what is the total cost for one year of holding the minimum cost cash balance according to the Baumol model?

a. $6,928

b. $173

c. $3,464

d. $346

e. $748

3. Which of the following is true of the EOQ model? Note that the optimal order quantity, Q, will be called EOQ.

a. If the annual sales, in units, increases by 20%, then EOQ will increase by 20%.

b. If the average inventory increases by 20%, then the total carrying costs will increase by 20%.

c. If the average inventory increases by 20% the total order costs will increase by 20%.

d. The EOC is the same for all companies.

e. If the fixed per order cost increases by 20%, then EOQ will increase by 20%.

4. If a company increases its safety stock, then its EOQ will go up.

a. True

b. False

5. If a company increases its safety stock, then its average inventory will go up.

a. True

b. False