Financial Management for Project Managers Inventory Management 2 — Questions and Answers
Question 1: A project manager notices that holding costs for raw materials represent 28% of unit value annually. Which inventory strategy would most directly reduce this cost?
- Increase safety stock levels
- Implement Just-In-Time (JIT) delivery (Correct answer)
- Switch to FIFO valuation method
- Extend payment terms with suppliers
Correct answer: Implement Just-In-Time (JIT) delivery
JIT delivery minimizes on-hand inventory, directly reducing holding costs such as storage, insurance, and capital tied up in stock.
Question 2: In the Economic Order Quantity (EOQ) model, what happens to the optimal order quantity if annual demand doubles?
- It doubles
- It quadruples
- It increases by approximately 41% (Correct answer)
- It remains unchanged
Correct answer: It increases by approximately 41%
EOQ is proportional to the square root of demand, so doubling demand multiplies EOQ by √2 ≈ 1.41, a 41% increase.
Question 3: Which inventory valuation method results in the highest net income during a period of rising prices?
- LIFO
- FIFO (Correct answer)
- Weighted Average Cost
- Specific Identification
Correct answer: FIFO
FIFO assigns lower (older) costs to COGS during rising prices, leaving higher-cost items in ending inventory and resulting in higher reported net income.
Question 4: A project has a reorder point of 500 units and an average daily usage of 50 units. What is the implied lead time in days?
- 5 days
- 10 days (Correct answer)
- 25 days
- 50 days
Correct answer: 10 days
Reorder Point = Average Daily Usage × Lead Time, so Lead Time = 500 ÷ 50 = 10 days.
Question 5: What does a high inventory turnover ratio relative to industry benchmarks typically indicate?
- Excessive safety stock
- Efficient inventory management or strong sales (Correct answer)
- Poor supplier relationships
- High carrying costs
Correct answer: Efficient inventory management or strong sales
A high turnover ratio means inventory is sold and replaced quickly, indicating efficient operations or robust demand.
Question 6: In ABC inventory analysis, which category typically represents the smallest percentage of SKUs but the highest percentage of annual inventory value?
- Category C
- Category B
- Category A (Correct answer)
- Category D
Correct answer: Category A
Category A items are typically 10-20% of SKUs but account for 70-80% of total inventory value, warranting the tightest controls.
Question 7: A project manager is evaluating whether to place one large order or several smaller orders. Which cost component favors placing fewer, larger orders?
- Holding costs
- Ordering costs (Correct answer)
- Shortage costs
- Quality inspection costs
Correct answer: Ordering costs
Ordering costs (setup, processing, freight per order) are incurred each time an order is placed, so fewer orders reduce total ordering costs.
Financial Management for Project Managers Inventory Management 2
A project manager notices that holding costs for raw materials represent 28% of unit value annually.
Which inventory strategy would most directly reduce this cost?