[amp_mcq option1=”Both statements are true” option2=”Both statements are false” option3=”Statement I is true, but Statement II is false” option4=”Statement I is false, but Statement II is true” correct=”option3″]
The correct answer is: Statement I is true, but Statement II is false.
Statement I is true. Working capital leverage measures the responsiveness of return on equity for changes in current assets. It is calculated by dividing the return on equity by the return on assets. A higher working capital leverage ratio indicates that a company is more sensitive to changes in current assets.
Statement II is false. The economic ordering quantity (EOQ) is the optimal quantity of an item to order in order to minimize the total costs of ordering and carrying inventory. It is calculated by using the following formula:
EOQ = รขยย(2DC/IC)
where:
D = annual demand for the item
C = unit cost of the item
I = inventory carrying cost per unit per year
In this case, the annual demand for the item is 3,200 units, the unit cost is Rs. 6, the inventory carrying cost is 25% per annum, and the cost of one procurement is Rs. 150. Substituting these values into the formula, we get:
EOQ = รขยย(2 * 3200 * 6 / 0.25) = 700 units
Therefore, the economic ordering quantity for this item is 700 units.