AICPA CPA-Business Exam - Topic 1 Question 64 Discussion

Actual exam question for AICPA's CPA-Business exam

Question #: 64
Topic #: 1

Handyman Inc. operates a chain of hardware stores across New England. The controller wants to determine the optimum safety stock levels for an air purifier unit. The inventory manager has compiled the following data.

* The annual carrying cost of inventory approximates 20 percent of the investment in inventory.

* The inventory investment per unit averages $50.

* The stockout cost is estimated to be $5 per unit.

* The company orders inventory on the average of ten times per year.

* Total cost = carrying cost + expected stockout cost.

* The probabilities of a stockout per order cycle with varying levels of safety stock are as follows.

The total cost of safety stock on an annual basis with a safety stock level of 100 units is:

A$1,750

B$1,950

C$2,000

D$650

Show Suggested Answer

Suggested Answer: A

Choice 'a' is correct. 7.0 percent cost of funds from retained earnings.

The cost of retained earnings is equal to the rate of return required by the firm's common shareholders (or, in effect, the return 'lost' by them when the firm chooses to fund with retained earnings). While oftentimes this rate is somewhat subjective, we are given the facts to exactly answer the question in this case. The stock is currently selling for $100/share, and the dividend is given at $7/share.

$7 / $100 = 7%

Choices 'b', 'c', and 'd' are incorrect, per the above Explanation:/calculation.

by Cordelia at Jan 05, 2023, 09:24 AM

Limited Time Offer

25%

Off

Get Premium CPA-Business Questions as Interactive Web-Based Practice Test or PDF

Contribute your Thoughts:

Submit Cancel

Keith

4 months ago

$650? That seems way too low for safety stock costs!

upvoted 0 times

...

Carlton

4 months ago

I agree, $1,950 sounds about right.

upvoted 0 times

...

Raul

4 months ago

Wait, how do we even calculate the stockout cost here?

upvoted 0 times

...

Sabra

4 months ago

I think the total cost will be higher than $1,750.

upvoted 0 times

...

Susana

4 months ago

The carrying cost is 20% of $50, so that's $10 per unit.

upvoted 0 times

...

Rory

5 months ago

I think the carrying cost for 100 units would be $1,000, but I'm not confident about the stockout cost part. I need to double-check my calculations.

upvoted 0 times

...

Providencia

5 months ago

I feel like I might be overthinking the probabilities of stockouts. I hope I can remember how to use them correctly in the total cost calculation.

upvoted 0 times

...

Tijuana

5 months ago

This question seems similar to one we practiced where we had to find total costs based on safety stock levels. I think I need to apply the same logic here.

upvoted 0 times

...

Ahmed

5 months ago

I remember we calculated carrying costs and stockout costs in class, but I'm not sure how to combine them for safety stock.

upvoted 0 times

...

Georgiann

5 months ago

Integrating the community is a smart move in my opinion. Sure, there are some risks, but the benefits of getting fresh eyes on the product and finding more bugs outweigh them. I'd definitely recommend option A.

upvoted 0 times

...

Cecily

5 months ago

I think this is a straightforward question about accounting for investments. The key details are that GH has significant influence over JK but not control, so I believe the answer is A - Associate.

upvoted 0 times

...

Diane

5 months ago

Okay, based on the information provided, it looks like VANG is used to model the configuration used by NETCONF operations, and to replace RESTCONF as a mechanism to install and manipulate configuration. I'll select those two options.

upvoted 0 times

...

Gwen

5 months ago

Connecting the VPCs using Cloud VPN and Cloud Router seems like the logical first step to integrate the networking. Then I'll need to figure out the best way to handle the DNS piece.

upvoted 0 times

...

Jenifer

5 months ago

Okay, let's see. I know the cloud can provide a lot of compute power and storage for machine learning workloads, so that's probably relevant. And the managed services aspect is interesting - I wonder if that's one of the right answers.

upvoted 0 times

...

Francoise

10 months ago

So, the controller wants to know the optimal safety stock level for air purifiers, huh? I guess they're trying to keep the air in those stores as clean as the books. Maybe they should consider adding a few extra units just in case the accountants get a little too... purified.

upvoted 0 times

...

Stephen

10 months ago

Hmm, let's see. Carrying cost, stockout cost, probability of a stockout... Sounds like a recipe for a perfectly balanced financial statement. And if the inventory manager has their way, we'll be seeing a lot of purified air in those stores!

upvoted 0 times

Sylvie

8 months ago

C) $2,000

upvoted 0 times

...

Shawna

8 months ago

B) $1,950

upvoted 0 times

...

Toshia

9 months ago

A) $1,750

upvoted 0 times

...

Anisha

10 months ago

Okay, time to put on my best accountant hat. The carrying cost is easy, $1,000. The stockout cost is a bit trickier, but with a probability of 0.001 and a cost of $5 per unit, that's $0.05 per unit. Add those together and... voila, $1,000.05! Wait, is that the right answer? *scratches head*

upvoted 0 times

...

Karrie

10 months ago

Let's see, the carrying cost is 20% of $50 per unit, so $10 per unit. With 100 units, that's $1,000. The expected stockout cost is $5 per unit times the probability of 0.001, which is $0.05 per unit. With 100 units, that's $5. The total cost is $1,000 + $5 = $1,005. Aha, I got it!

upvoted 0 times

Lashawn

9 months ago

Nice work! The total cost with 100 units of safety stock is $1,005.

upvoted 0 times

...

Lovetta

9 months ago

So, the total cost is $1,005. Great job on the calculation!

upvoted 0 times

...

Orville

9 months ago

That's correct! The total cost with a safety stock level of 100 units is $1,005.

upvoted 0 times

...

Shawna

10 months ago

Hmm, I think the key here is the probability of a stockout. With 100 units of safety stock, the probability is 0.1%. So the expected stockout cost is $5 x 0.001 = $0.05. Add that to the carrying cost of $1,000, and the total cost is $1,000 + $0.05 = $1,000.05. Not quite right, but closer.

upvoted 0 times

Tess

8 months ago

D) $650

upvoted 0 times

...

Mitzie

8 months ago

C) $2,000

upvoted 0 times

...

Genevive

8 months ago

B) $1,950

upvoted 0 times

...

Kara

8 months ago

A) $1,750

upvoted 0 times

...

Sheron

8 months ago

D) $650

upvoted 0 times

...

Charisse

8 months ago

C) $2,000

upvoted 0 times

...

Vallie

8 months ago

B) $1,950

upvoted 0 times

...

Gladis

10 months ago

A) $1,750

upvoted 0 times

...

Glendora

10 months ago

Okay, let's break this down. The carrying cost per unit is 20% of $50, which is $10. With a safety stock of 100 units, the carrying cost is $10 x 100 = $1,000. The expected stockout cost is 0.001 x $5 = $0.05 per unit, with 100 units that's $0.05 x 100 = $5. The total cost is $1,000 + $5 = $1,005. Definitely not the correct answer.

upvoted 0 times