Exam Questions Chapter 13 Inventory Management Russell - Operations Management Canadian 1e Complete Test Bank by Roberta S. Russell. DOCX document preview.
CHAPTER 13
INVENTORY MANAGEMENT
CHAPTER LEARNING OBJECTIVES
1. List reasons why companies keep inventory and explain how information technology is changing the buyer–supplier relationship. A company holds inventories of finished goods to meet customer demand for a product; to have a buffer on hand to meet variations in product demand; to meet demand that is seasonal or cyclical; or to take advantage of price discounts for purchasing in volume. At the other end of the supply chain, a company might keep large stocks of parts and material inventory to meet changes in supplier deliveries. Inventories are kept between stages in the manufacturing process so that production can continue smoothly if there are temporary work stoppages. Information technology and software, such as enterprise resource planning (ERP) systems, barcodes, radio frequency identification (RFID), and point-of-sales data enable companies to track, locate, and control inventory throughout its supply chain—including locations other than their own facilities. Information technology systems help to connect and coordinate supply chain members through the development of supplier hubs, where buyers, suppliers, and 3PL share information, consolidate shipping, and plan and execute logistics.
2. Discuss the key elements of inventory and its management, including inventory costs. Two key elements of inventory management are customer demand and inventory costs. Inventory exists to meet customer demand, so demand is the starting point for managing inventory. Demand may be dependent (items are used internally to produce a final product) or independent (items are final products demanded by external customers). There are three basic costs associated with inventory:
1. Carrying (holding) costs: costs of holding an item in inventory
2. Ordering costs: costs of replenishing inventory
3. Shortage costs: temporary or permanent loss of sales when demand cannot be met
To minimize inventory costs, a company should employ an inventory control system that will indicate how much inventory should be ordered and when it should be ordered.
3. Contrast continuous and periodic inventory systems and classify inventory according to the ABC system. In a continuous inventory system (also called a perpetual or a fixed-order-quantity system), a continual record of the inventory level for every item is maintained. When the inventory on hand decreases to a predetermined level (reorder point), a new order is placed to replenish inventory. An order is placed for a fixed amount (economic order quantity) that minimizes the total inventory costs. An advantage of a continuous system is that because inventory is continuously monitored, management always knows the inventory status. However, maintaining a continual record of the amount of inventory on hand can also be costly. In a periodic inventory system (also called a fixed-time-period or a periodic review system), the inventory on hand is counted at specific intervals—for example, every week. After the inventory in stock is determined, an order is placed for an amount that will bring inventory back up to a desired level. Inventory is not monitored during the time between orders, so it has the advantage of little or no required record keeping. However, there is less direct control, which typically results in larger inventory levels than in a continuous system to guard against unexpected stock-outs. This system also requires that a new order quantity be determined each time a periodic order is made.
The ABC system is a method for classifying inventory according to several criteria, including its dollar value to the firm. Class A items represent about 5% to 15% of all inventory units, but account for 70% to 80% of the total dollar value of inventory. Class B items represent about 30% of all inventory units, but only about 15% of total inventory dollar value. Class C items generally account for 50% to 60% of all inventory units, but represent only 5% to 10% of total dollar value.
4. Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system. The EOQ is the optimal order quantity that will minimize the sum of carrying and ordering costs. Annual ordering cost is computed by multiplying the cost per order (Co) times the number of orders per year. Annual demand (D) is assumed to be known and constant, so the number of orders will be D/Q, where Q is the order size. Total annual carrying cost is computed by multiplying the annual per-unit carrying cost (Cc) by the average inventory level. The average inventory level is one-half of Q or Q/2. The total annual inventory cost is the sum of the ordering and carrying costs:
TC = +
A variation of the basic EOQ model is the EPQ model (also called the gradual usage and non-instantaneous receipt model) in which an order is received gradually, as inventory is simultaneously being depleted. This system is commonly used when the inventory user is also the producer or when orders are delivered continuously over time.
5. Determine if an order size with a quantity discount is more cost effective than the EOQ. A quantity discount is a discount given for specific higher order quantities. The basic EOQ model can be used to determine the optimal order size with quantity discounts; however, the application of the model must be altered slightly. The total inventory cost function must now include the purchase price of the item being ordered.
TC = + + PD
Where, P is the per-unit price of the item and D is the annual demand.
6. Determine the appropriate reorder point in a continuous inventory system based on a target service level. The reorder point is the level of inventory at which a new order should be placed. The reorder point for the basic EOQ model with constant demand and a constant lead time to receive an order is equal to the amount demanded during the lead time: R = dL, where d = demand rate per period (e.g., daily) and L = lead time.
7. Calculate the order quantity for a periodic inventory system. In the periodic (or fixed-time-period) inventory system the time between orders is constant and the order size varies. This system is often used by small retailers. A periodic inventory system normally requires a larger safety stock. The order size for a fixed-period model given variable daily demand that is normally distributed is determined by
Q = d(tb +L)+zσd –I
8. Determine the optimal order quantity for a single-period inventory model. In single-period inventory models, the optimal order quantity minimizes the cost of shortage/underage and the excess/overage. The shortage cost refers to the opportunity cost of lost sales. The excess cost is the cost of overestimating the demand. It represents the loss of ordering one additional item that has to be salvaged. The optimal order quantity (Q*) balances the two risks involved, and corresponds to the service level given by,
Service Level = P(D≤Q*) =
TRUE-FALSE STATEMENTS
1. Seasonal inventory allows a firm to maintain a smooth production flow throughout the year.
Difficulty: Easy
Learning Objective: List reasons why companies keep inventory and explain how information technology is changing the buyer–supplier relationship.
Section Reference: 13.1 The Role of Inventory in Supply Chain Management
2. Hedging involves buying larger amounts of inventory in anticipation of future price increases.
Difficulty: Medium
Learning Objective: List reasons why companies keep inventory and explain how information technology is changing the buyer–supplier relationship.
Section Reference: 13.1 The Role of Inventory in Supply Chain Management
3. Inventory can take the form of tools and equipment.
Difficulty: Medium
Learning Objective: List reasons why companies keep inventory and explain how information technology is changing the buyer–supplier relationship.
Section Reference: 13.1 The Role of Inventory in Supply Chain Management
4. Buffer inventories provide independence between different stages of the production process.
Difficulty: Medium
Learning Objective: List reasons why companies keep inventory and explain how information technology is changing the buyer–supplier relationship.
Section Reference: 13.1 The Role of Inventory in Supply Chain Management
5. The conventional approach to inventory management is to maintain a level of inventory that reflects a compromise between inventory cost and customer service.
Difficulty: Medium
Learning Objective: List reasons why companies keep inventory and explain how information technology is changing the buyer–supplier relationship.
Section Reference: 13.1 The Role of Inventory in Supply Chain Management
6. Inventory management is concerned with how much to order and when to order.
Difficulty: Medium
Learning Objective: Discuss the key elements of inventory and its management, including inventory costs.
Section Reference: 13.2 The Key Elements of Inventory Management
7. Dependent demand items are typically products for use by the final customer.
Difficulty: Medium
Learning Objective: Discuss the key elements of inventory and its management, including inventory costs.
Section Reference: 13.2 The Key Elements of Inventory Management
8. Dependent demand items consist of component parts or materials used in the production process to produce a final product.
Difficulty: Medium
Learning Objective: Discuss the key elements of inventory and its management, including inventory costs.
Section Reference: 13.2 The Key Elements of Inventory Management
9. The three basic costs associated with inventory are holding costs, ordering costs and shortage costs.
Difficulty: Medium
Learning Objective: Discuss the key elements of inventory and its management, including inventory costs.
Section Reference: 13.2 The Key Elements of Inventory Management
10. Product deterioration, spoilage, breakage, and obsolescence are examples of shortage costs.
Difficulty: Medium
Learning Objective: Discuss the key elements of inventory and its management, including inventory costs.
Section Reference: 13.2 The Key Elements of Inventory Management
11. Shortage costs are easier to determine than carrying costs or ordering costs.
Difficulty: Medium
Learning Objective: Discuss the key elements of inventory and its management, including inventory costs.
Section Reference: 13.2 The Key Elements of Inventory Management
12. Dependent demand is determined by external market conditions.
Difficulty: Medium
Learning Objective: Discuss the key elements of inventory and its management, including inventory costs.
Section Reference: 13.2 The Key Elements of Inventory Management
13. Finished product is an example of a dependent demand item.
Difficulty: Easy
Learning Objective: Discuss the key elements of inventory and its management, including inventory costs.
Section Reference: 13.2 The Key Elements of Inventory Management
14. Carry costs and ordering costs are inversely related.
Difficulty: Medium
Learning Objective: Discuss the key elements of inventory and its management, including inventory costs.
Section Reference: 13.2 The Key Elements of Inventory Management
15. Carrying costs are more difficult to determine than ordering or shortage costs.
Difficulty: Easy
Learning Objective: Discuss the key elements of inventory and its management, including inventory costs.
Section Reference: 13.2 The Key Elements of Inventory Management
16. As the level of inventory increases to provide better customer service, quality-related customer service costs decrease.
Difficulty: Medium
Learning Objective: Contrast continuous and periodic inventory systems and classify inventory according to the ABC system.
Section Reference: 13.3 Inventory Control Systems
17. Continuous inventory systems often incorporate information technology to improve the speed and accuracy of data entry and retrieval.
Difficulty: Medium
Learning Objective: Contrast continuous and periodic inventory systems and classify inventory according to the ABC system.
Section Reference: 13.3 Inventory Control Systems
18. The ABC classification system is a method for classifying inventory based on the percentage of total value and the percentage of total quantity.
Difficulty: Medium
Learning Objective: Contrast continuous and periodic inventory systems and classify inventory according to the ABC system.
Section Reference: 13.3 Inventory Control Systems
19. Class A items in the ABC classification system require less monitoring and control than Class C items.
Difficulty: Medium
Learning Objective: Contrast continuous and periodic inventory systems and classify inventory according to the ABC system.
Section Reference: 13.3 Inventory Control Systems
20. The reorder point is the level of inventory that prompts a new order to be placed in a continuous inventory system.
Difficulty: Medium
Learning Objective: Contrast continuous and periodic inventory systems and classify inventory according to the ABC system.
Section Reference: 13.3 Inventory Control Systems
21. The time between orders is variable and the order quantity is constant in the periodic inventory system.
Difficulty: Medium
Learning Objective: Contrast continuous and periodic inventory systems and classify inventory according to the ABC system.
Section Reference: 13.3 Inventory Control Systems
22. Continuous inventory systems are primarily intended for lower cost items because they are easier to use requiring fewer resources.
Difficulty: Medium
Learning Objective: Contrast continuous and periodic inventory systems and classify inventory according to the ABC system.
Section Reference: 13.3 Inventory Control Systems
23. Continuous inventory systems are also referred to as a fixed-order-quantity system.
Difficulty: Medium
Learning Objective: Contrast continuous and periodic inventory systems and classify inventory according to the ABC system.
Section Reference: 13.3 Inventory Control Systems
24. Periodic inventory systems initiate a new order when the level of inventory falls to the reorder point.
Difficulty: Medium
Learning Objective: Contrast continuous and periodic inventory systems and classify inventory according to the ABC system.
Section Reference: 13.3 Inventory Control Systems
25. In ABC analysis, each class of inventory requires different levels of inventory monitoring and control.
Difficulty: Medium
Learning Objective: Contrast continuous and periodic inventory systems and classify inventory according to the ABC system.
Section Reference: 13.3 Inventory Control Systems
26. The order quantity for a periodic inventory system remains constant.
Difficulty: Easy
Learning Objective: Contrast continuous and periodic inventory systems and classify inventory according to the ABC system.
Section Reference: 13.3 Inventory Control Systems
27. The periodic inventory system is often preferred for high quantity, low value items.
Difficulty: Easy
Learning Objective: Contrast continuous and periodic inventory systems and classify inventory according to the ABC system.
Section Reference: 13.3 Inventory Control Systems
28. The economic order quantity (EOQ) model determines the optimal order size that minimizes total annual inventory costs.
Difficulty: Medium
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
29. For a given annual demand, total annual ordering cost is independent of order size.
Difficulty: Hard
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
30. The EOQ model determines the optimal order size that minimizes the sum of carrying cost and shortage costs.
Difficulty: Easy
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
31. The order cycle is the time between receipts of orders in an inventory cycle.
Difficulty: Easy
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
32. The number of orders can be calculated by dividing the daily demand rate, d, by the order quantity, Q.
Difficulty: Medium
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
33. The average inventory can be calculated by dividing the annual demand, D, by 2.
Difficulty: Easy
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
34. The economic order quantity occurs when the annual carrying cost is equal to the annual ordering cost.
Difficulty: Easy
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
35. With the economic order quantity (EOQ) model, the number of orders increases as the order size decreases.
Difficulty: Medium
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
36. With the economic order quantity (EOQ) model, increasing the order quantity reduces inventory carrying cost.
Difficulty: Medium
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
37. The production quantity model, a variation of the basic EOQ model, assumes non-instantaneous replenishment.
Difficulty: Hard
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
38. The quantity discount model evaluates whether using an order size that qualifies for a price discount is always less cost effective than using the economic order quantity.
Difficulty: Easy
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
39. A quantity discount is a price discount available if a predetermined number of units is ordered.
Difficulty: Medium
Learning Objective: Determine if an order size with a quantity discount is more cost effective than the EOQ.
Section Reference: 13.5 Quantity Discounts
40. When demand is uncertain, a safety stock is often added to the expected demand during lead time to prevent a stockout.
Difficulty: Medium
Learning Objective: Determine the appropriate reorder point in a continuous inventory system based on a target service level.
Section Reference: 13.6 Reorder Point
41. Maintaining a desired service level influences the level of safety stock.
Difficulty: Medium
Learning Objective: Determine the appropriate reorder point in a continuous inventory system based on a target service level.
Section Reference: 13.6 Reorder Point
MULTIPLE CHOICE QUESTIONS
42. Inventory costs ___ when higher levels of inventory are needed to improve customer service.
a) decrease
b) stay the same
c) increase
d) cannot be estimated
Difficulty: Medium
Learning Objective: List reasons why companies keep inventory and explain how information technology is changing the buyer–supplier relationship.
Section Reference: 13.1 The Role of Inventory in Supply Chain Management
43. A company may purchase larger amounts of inventory for all the following reasons except
a) to reduce inventory carrying costs.
b) to take advantage of quantity discounts.
c) as a hedge against future price increases.
d) to obtain lower prices purchasing in volume.
Difficulty: Medium
Learning Objective: List reasons why companies keep inventory and explain how information technology is changing the buyer–supplier relationship.
Section Reference: 13.1 The Role of Inventory in Supply Chain Management
44. Inventory management includes all the following activities except determining
a) the amount of inventory to keep in stock.
b) customer demand.
c) how much to order.
d) when to order.
Difficulty: Easy
Learning Objective: List reasons why companies keep inventory and explain how information technology is changing the buyer–supplier relationship.
Section Reference: 13.1 The Role of Inventory in Supply Chain Management
45. ___ demand items are used in the process of producing a final product.
a) Dependent
b) Independent
c) Seasonal
d) Cyclical
Difficulty: Medium
Learning Objective: Discuss the key elements of inventory and its management, including inventory costs.
Section Reference: 13.2 The Key Elements of Inventory Management
46. Receiving, handling, and shipping costs are examples of
a) shortage costs.
b) carrying costs.
c) ordering costs.
d) none of the above.
Difficulty: Medium
Learning Objective: Discuss the key elements of inventory and its management, including inventory costs.
Section Reference: 13.2 The Key Elements of Inventory Management
47. In general, as the order size increases
a) ordering costs decrease and carrying costs increase.
b) ordering costs increase and carrying costs decrease.
c) both ordering and carrying costs increase.
d) both ordering and carrying costs decrease.
Difficulty: Medium
Learning Objective: Discuss the key elements of inventory and its management, including inventory costs.
Section Reference: 13.2 The Key Elements of Inventory Management
48. Which of the following is not considered a form of inventory?
a) items being transported
b) tools and equipment
c) supplies
d) backorders
Difficulty: Easy
Learning Objective: Discuss the key elements of inventory and its management, including inventory costs.
Section Reference: 13.2 The Key Elements of Inventory Management
49. Which of the following is not an example of inventory carried to satisfy independent demand?
a) spare parts
b) finished product
c) raw materials
d) All the above satisfy independent demand.
Difficulty: Medium
Learning Objective: Discuss the key elements of inventory and its management, including inventory costs.
Section Reference: 13.2 The Key Elements of Inventory Management
50. A continuous inventory system is also known as a
a) fixed-time period system.
b) fixed-order quantity system.
c) fixed-lead time system.
d) fixed-amount system.
Difficulty: Easy
Learning Objective: Discuss the key elements of inventory and its management, including inventory costs.
Section Reference: 13.2 The Key Elements of Inventory Management
51. A periodic inventory system is also known as a
a) fixed-time period system.
b) fixed-order quantity system.
c) fixed-lead time system.
d) fixed-amount system.
Difficulty: Easy
Learning Objective: Discuss the key elements of inventory and its management, including inventory costs.
Section Reference: 13.2 The Key Elements of Inventory Management
52. The ___ classification system classifies inventory according to its dollar value to the firm.
a) periodic
b) continuous
c) ABC
d) EOQ
Difficulty: Medium
Learning Objective: Contrast continuous and periodic inventory systems and classify inventory according to the ABC system.
Section Reference: 13.3 Inventory Control Systems
53. A service level of 95% means there is a 0.95 probability
a) of meeting all demand.
b) of a stockout.
c) that supply will exceed demand.
d) that demand will be met during the lead time.
Difficulty: Medium
Learning Objective: Contrast continuous and periodic inventory systems and classify inventory according to the ABC system.
Section Reference: 13.3 Inventory Control Systems
54. Which of the following is not an assumption of the EOQ model?
a) Demand rate is known and constant.
b) Shortages are allowed.
c) Lead time is constant.
d) Order quantity is received all at once.
Difficulty: Medium
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
55. A restaurant currently uses 62,500 boxes of napkins each year at a constant daily rate. If the cost to order napkins is $200.00 per order and the annual carrying cost for one box of napkins is $1.00, then the economic order quantity for napkins is
a) 62,500 boxes.
b) 10,000 boxes.
c) 5,000 boxes.
d) 2,500 boxes.
Difficulty: Medium
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
56. A restaurant currently uses 62,500 boxes of napkins each year at a constant daily rate. The cost to order napkins is $200.00 per order and the annual carrying cost for one box of napkins is $1.00. If the restaurant orders the economic order quantity each time an order is placed, then ___ orders are placed during the year.
a) 13
b) 15
c) 20
d) 25
Difficulty: Medium
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
57. A restaurant currently uses 62,500 boxes of napkins each year at a constant daily rate over the 365 days that it is open. The cost to order napkins is $200.00 per order and the annual carrying cost for one box of napkins is $1.00. If the restaurant orders the economic order quantity then the time between orders (order cycle) is
a) 125 days.
b) 75.3 days.
c) 32.8 days.
d) 29.2 days.
Difficulty: Medium
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
58. A restaurant currently uses 62,500 boxes of napkins each year at a constant daily rate. The cost to order napkins is $200.00 per order and the annual carrying cost for one box of napkins is $1.00. If the restaurant orders the economic order quantity then the total annual inventory cost for napkins is
a) $62,500.
b) $5,000.
c) $2,500.
d) $1250.
Difficulty: Medium
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
59. A restaurant currently uses 62,500 boxes of napkins each year at a constant daily rate. The cost to order napkins is $200.00 per order and the annual carrying cost for one box of napkins is $1.00. If the restaurant orders the economic order quantity, then the average inventory for napkins is
a) 62,500 boxes.
b) 31,250 boxes.
c) 5,000 boxes.
d) 2,500 boxes.
Difficulty: Medium
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
60. Annual demand for a product is 40,000 units. The product is used at a constant rate over the 365 days the company is open every year. The annual holding cost for the product is estimated to be $2.50 per unit and the cost of placing each order is $125.00. If the company orders according to the economic order quantity (EOQ) formula then its optimal order size for this product would be
a) 2,000 units.
b) 4,000 units.
c) 20,000 units.
d) 40,000 units.
Difficulty: Medium
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
61. Annual demand for a product is 40,000 units. The product is used at a constant rate over the 365 days the company is open every year. The annual holding cost for the product is estimated to be $2.50 per unit and the cost of placing each order is $125.00. If the company orders according to the economic order quantity (EOQ) formula then ___ orders are placed annually.
a) 5
b) 10
c) 15
d) 20
Difficulty: Medium
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
62. Annual demand for a product is 40,000 units. The product is used at a constant rate over the 365 days the company is open every year. The annual holding cost for the product is estimated to be $2.50 per unit and the cost of placing each order is $125.00. If the company orders according to the economic order quantity (EOQ) formula, then the time between orders (order cycle time) is
a) 18.25 days.
b) 24.33 days.
c) 36.5 days.
d) 73 days.
Difficulty: Medium
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
63. Annual demand for a product is 40,000 units. The product is used at a constant rate over the 365 days the company is open every year. The annual holding cost for the product is estimated to be $2.50 per unit and the cost of placing each order is $125.00. If the company orders according to the economic order quantity (EOQ) formula, then its total annual inventory cost for this product would be
a) $100,000.
b) $50,000.
c) $5,000.
d) $2,500.
Difficulty: Medium
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
64. Annual demand for a product is 40,000 units. The product is used at a constant rate over the 365 days the company is open every year. The annual holding cost for the product is estimated to be $2.50 per unit and the cost of placing each order is $125.00. If the company orders according to the economic order quantity (EOQ) formula then its average inventory level for this product would be
a) 20,000 units.
b) 10,000 units.
c) 2,500 units.
d) 1,000 units.
Difficulty: Medium
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
65. Which of the following is not an assumption of the EOQ model?
a) Demand is known and constant.
b) No shortages are allowed.
c) Lead time is determined by quantity ordered.
d) Order quantity is received all at once.
Difficulty: Medium
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
66. The economic order quantity is most widely used for determining how much to order in
a) a periodic inventory system.
b) a continuous inventory system.
c) an on-demand inventory system.
d) none of the above.
Difficulty: Medium
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
67. The quantity discount model considers
a) purchase price.
b) carrying cost.
c) ordering cost.
d) all the above.
Difficulty: Easy
Learning Objective: Use the basic economic order quantity (EOQ) model and the economic production quantity (EPQ) model to calculate optimal order/production quantity and related values in a continuous inventory system.
Section Reference: 13.4 Economic Order Quantity Models
68. The demand for an electronic component is normally distributed with an average daily demand of 500 units and a standard deviation of 50. The lead-time for the component is 9 days. If a service level of 95% is desired, then the company’s reorder point for this component is approximately
a) 3785 units.
b) 4500 units.
c) 4627units.
d) 4747units.
Difficulty: Medium
Learning Objective: Determine the appropriate reorder point in a continuous inventory system based on a target service level.
Section Reference: 13.6 Reorder Point
69. The demand for an electronic component is normally distributed with an average daily demand of 500 units and a standard deviation of 50. The lead time for the component is 9 days. If a service level of 95% is desired, then the company’s safety stock for this component is approximately
a) 150 units.
b) 247 units.
c) 336 units.
d) 740 units.
Difficulty: Medium
Learning Objective: Determine the appropriate reorder point in a continuous inventory system based on a target service level.
Section Reference: 13.6 Reorder Point
70. The demand for an electronic component is normally distributed with an average daily demand of 500 units and a standard deviation of 50. The lead time for the component is 9 days. If the company sets a reorder point of 4650 for this component, then its service level is approximately
a) 50 percent.
b) 84 percent.
c) 92 percent.
d) 98 percent.
Difficulty: Medium
Learning Objective: Determine the appropriate reorder point in a continuous inventory system based on a target service level.
Section Reference: 13.6 Reorder Point
71. A product’s usage is normally distributed with a weekly average demand of 2,000 units and a weekly standard deviation of 125. The lead time for the product is 4 weeks. If the company would like to have a service level of 90% for this product, then the reorder point is approximately
a) 8320 units.
b) 9218 units.
c) 10134 units.
d) 11244 units.
Difficulty: Medium
Learning Objective: Determine the appropriate reorder point in a continuous inventory system based on a target service level.
Section Reference: 13.6 Reorder Point
72. A product’s usage is normally distributed with a weekly average demand of 2,000 units and a weekly standard deviation of 125. The product’s lead time is 4 weeks. Currently, the reorder point for this product is 8,200. If the company would like to have a service level of 95% for this product then
a) it must decrease its safety stock by approximately 412 units.
b) it must decrease its safety stock by approximately 212 units.
c) it must increase its safety stock by approximately 412 units.
d) it must increase its safety stock by approximately 212 units.
Difficulty: Medium
Learning Objective: Determine the appropriate reorder point in a continuous inventory system based on a target service level.
Section Reference: 13.6 Reorder Point
SHORT-ANSWER ESSAY QUESTIONS
73. List several types of uncertainty that may contribute to higher inventory levels.
Difficulty: Easy
Section Reference: Introduction
74. Explain the relationship between ordering costs and carrying costs in the economic order quantity (EOQ) model.
Difficulty: Medium
Learning Objective: Discuss the key elements of inventory and its management, including inventory costs.
Section Reference: 13.2 The Key Elements of Inventory Management
75. List and discuss the costs used to determine carrying cost, holding cost and shortage cost.
Difficulty: Easy
Learning Objective: Discuss the key elements of inventory and its management, including inventory costs.
Section Reference: 13.2 The Key Elements of Inventory Management
76. Briefly compare and contrast a continuous inventory system to a periodic inventory system listing the advantages and disadvantages of each.
Difficulty: Medium
Learning Objective: Contrast continuous and periodic inventory systems and classify inventory according to the ABC system.
Section Reference: 13.3 Inventory Control Systems
77. Explain when it is better to use the continuous inventory system and when it is better to use the periodic inventory system. Discuss how the ABC classification system provides guidance in selecting one versus the other.
Difficulty: Medium
Learning Objective: Contrast continuous and periodic inventory systems and classify inventory according to the ABC system.
Section Reference: 13.3 Inventory Control Systems
78. Make a list of the basic steps involved in using the quantity discount model and discuss each.
Difficulty: Medium
Learning Objective: Determine if an order size with a quantity discount is more cost effective than the EOQ.
Section Reference: 13.5 Quantity Discounts
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