Inventory Management Chapter 13 Test Bank

Chapter 13:

Inventory Management

True/False

1. Seasonal inventory allows a firm to maintain a smooth production flow throughout the year.

Difficulty: Easy

Learning Objective: LO 1

1. _________ involves buying larger amounts of inventory in anticipation of future price increases.
   1. Hedging
   2. Continuous
   3. Periodic
   4. Work in process

1. ________ inventories provide independence between different stages of the production process.
   1. Seasonal
   2. Continuous
   3. Buffer
   4. Work in process

Difficulty: Moderate

Learning Objective: LO 1

1. The objective of inventory management is to keep enough inventory on-hand to satisfy customer demand without regard to cost effectiveness.

Difficulty: Easy

Learning Objective: LO 1

1. The conventional approach to inventory management is to maintain a level of inventory that reflects a compromise between inventory cost and customer service.

Difficulty: Moderate

Learning Objective: LO 1

1. As the level of inventory increases to provide better customer service, quality-related customer service costs decrease.

Difficulty: Moderate

Learning Objective: LO 1

1. The ability to effectively satisfy internal or external demand in a timely, efficient manner is referred to as the level of
   1. customer demand.
   2. customer service.
   3. inventory.
   4. dependent demand.
2. Dependent demand is determined by external market conditions.

Difficulty: Moderate

Learning Objective: LO 2

1. Inventory can take the form of
   1. raw materials.
   2. items being transported.
   3. tools and equipment.
   4. All of the answer choices are correct.
2. Finished product is an example of a dependent demand item.

Difficulty: Easy

Learning Objective: LO 2

1. Carry costs and ordering costs are inversely related.

Difficulty: Moderate

Learning Objective: LO 2

12. Dependent demand items are typically products for use by the final customer.

Difficulty: Moderate

Learning Objective: LO 2

13. Dependent demand items consist of component parts or materials used in the production process to produce a final product.

Difficulty: Moderate

Learning Objective: LO 2

14. Which of the following is a cost associated with inventory?

1. holding costs
2. ordering costs
3. shortage costs
4. All of the answer choices are correct.

15. Product deterioration, spoilage, breakage, and obsolescence are examples of shortage costs.

Difficulty: Moderate

Learning Objective: LO 2

16. Shortage costs are easier to determine than carrying costs or ordering costs.

Difficulty: Moderate

Learning Objective: LO 2

17. Which of the following is NOT an example of a carrying cost?

1. facility storage
2. stockouts
3. material handling
4. labor
5. Inventory management is concerned with how much to order and when to order.

Difficulty: Moderate

Learning Objective: LO 3

1. Continuous inventory systems are primarily intended for lower cost items because they are easier to use, and require fewer resources.

Difficulty: Moderate

Learning Objective: LO 3

1. Continuous inventory systems are also referred to as a fixed-order-quantity system.

Difficulty: Moderate

Learning Objective: LO 3

1. Periodic inventory systems initiate a new order when the level of inventory falls to the reorder point.

Difficulty: Moderate

Learning Objective: LO 3

1. In ABC analysis, each class of inventory requires different levels of inventory monitoring and control.

Difficulty: Moderate

Learning Objective: LO 3

1. The _________ is the level of inventory that prompts a new order to be placed in a continuous inventory system.
   1. economic order quantity
   2. service level
   3. reorder point
   4. safety stock
2. The order quantity for a periodic inventory system remains constant.

Difficulty: Easy

Learning Objective: LO 3

1. The periodic inventory system is often preferred for
   1. low quantity, low value items.
   2. high quantity, low value items.
   3. low quantity, high value items.
   4. high quantity, high value items.

1. The time between orders is variable and the order quantity is constant in the periodic inventory system.

Difficulty: Moderate

Learning Objective: LO 3

1. Continuous inventory systems often incorporate information technology to improve the speed and accuracy of data entry and retrieval.

Difficulty: Moderate

Learning Objective: LO 3

1. The ABC classification system is a method for classifying inventory based on the percentage of total value and the percentage of total quantity.

Difficulty: Moderate

Learning Objective: LO 3

1. Class A items in the ABC classification system require less monitoring and control than Class C items.

Difficulty: Moderate

Learning Objective: LO 3

1. The economic order quantity (EOQ) model determines the optimal order size that minimizes
   1. total annual inventory.
   2. total annual inventory costs.
   3. total annual orders.
   4. total annual ordering costs.
2. For a given annual demand, total annual ordering cost is independent of order size.

Difficulty: Hard

Learning Objective: LO 4

1. The EOQ model determines the optimal order size that minimizes the sum of carrying costs and shortage costs.

Difficulty: Easy

Learning Objective: LO 4

1. The ________ is the time between receipts of orders in an inventory cycle.
   1. safety stock
   2. lead time
   3. order cycle
   4. transportation time
2. The number of orders can be calculated by dividing the daily demand rate, d, by the order quantity,

Difficulty: Moderate

Learning Objective: LO 4

1. The average inventory can be calculated by dividing the annual demand, D, by 2.

Difficulty: Easy

Learning Objective: LO 4

1. The economic order quantity occurs when the annual carrying cost is equal to the annual ordering cost.

Difficulty: Easy

Learning Objective: LO 4

1. With the economic order quantity (EOQ) model, the number of orders increases as the order size decreases.

Difficulty: Moderate

Learning Objective: LO 4

1. With the economic order quantity (EOQ) model, increasing the order quantity reduces inventory carrying cost.

Difficulty: Moderate

Learning Objective: LO 4

1. The production quantity model, a variation of the basic EOQ model, assumes non-instantaneous replenishment.

Difficulty: Hard

Learning Objective: LO 4

1. 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: LO 4

1. A quantity discount is a price discount available if a predetermined number of units is ordered.

Difficulty: Moderate

Learning Objective: LO 4

1. With the quantity discount model, the basic EOQ total cost formula is modified to include a term, PD, calculated by taking the purchase price multiplied by annual demand.

Difficulty: Moderate

Learning Objective: LO 4

1. With the quantity discount model, the first price point examined is the one associated with the EOQ quantity calculated using the basic model.

Difficulty: Moderate

Learning Objective: LO 4

1. When demand is uncertain, a safety stock is often added to the expected demand during lead time to prevent a stockout.

Difficulty: Moderate

Learning Objective: LO 5

1. Maintaining a desired service level influences the level of safety stock.

Difficulty: Moderate

Learning Objective: LO 5

1. Drugstores are one example of a business using a periodic inventory system because of their dependence on vendor-managed inventory.

Difficulty: Moderate

Learning Objective: LO 6

1. The order quantity cannot be calculated for a periodic inventory system that experiences variable demand.

Difficulty: Moderate

Learning Objective: LO 6

Multiple Choice

48. A company may purchase larger amounts of inventory for all the following reasons except

• 1. to reduce inventory carrying costs.
  2. to take advantage of quantity discounts.
  3. as a hedge against future price increases.
  4. to obtain lower prices purchasing in volume.

Difficulty: Moderate

Learning Objective: LO 1

49. Inventory management includes all the following activities except determining

1. the amount of inventory to keep in stock.
2. customer demand .
3. how much to order.
4. when to order.

Difficulty: Easy

Learning Objective: LO 1

1. ________________ is additional inventory kept at various stages of the production process to provide independence between stages to avoid work stoppages.

a. Safety stock

b. Buffer stock
c. Finished stock

d. None of these answer choices is correct.

Difficulty: Easy

Learning Objective: LO 1

1. ________________ is additional inventory kept on hand to meet variations in product demand.

a. Safety stock

b. Buffer stock
c. Finished stock

d. None of these answer choices is correct.

Difficulty: Easy

Learning Objective: LO 1

1. Inventory costs _________________ when higher levels of inventory are needed to improve customer service.
2. decrease
3. stay the same
4. increase
5. cannot be estimated

Difficulty: Moderate

Learning Objective: LO 2

1. Customer service is defined as the ability to satisfy ______________ demand.
2. internal
3. external
4. internal and external
5. None of these answer choices is correct.

Difficulty: Moderate

Learning Objective: LO 2

1. The traditional approach to inventory management is to maintain a level of inventory that
2. minimizes inventory cost.
3. maximizes customer service.
4. maintains a balance between inventory cost and customer service.
5. None of these answer choices is correct.

Difficulty: Moderate

Learning Objective: LO 1

1. Which of the following is not considered a form of inventory?
   1. items being transported
   2. tools and equipment
   3. purchased parts and supplies
   4. backorders

Difficulty: Easy

Learning Objective: LO 2

1. Which of the following is not an example of inventory carried to satisfy independent demand?
   1. spare parts
   2. finished product
   3. raw materials
   4. All the answer choices are correct.

Difficulty: Moderate

Learning Objective: LO 2

1. ___________ demand items are used in the process of producing a final product.
2. Dependent
3. Independent
4. Seasonal
5. Cyclical

Difficulty: Moderate

Learning Objective: LO 2

1. Receiving, handling, and shipping costs are examples of
2. shortage costs.
3. carrying costs.
4. ordering costs.
5. None of these answer choices is correct.

Difficulty: Moderate

Learning Objective: LO 2

1. In general, as the order size increases
2. ordering costs decrease and carrying costs increase.
3. ordering costs increase and carrying costs decrease.
4. both ordering and carrying costs increase.
5. both ordering and carrying costs decrease.

Difficulty: Moderate

Learning Objective: LO 2

1. The _______________ classification system classifies inventory according to its dollar value to the firm.
2. periodic
3. continuous
4. ABC
5. EOQ

Difficulty: Moderate

Learning Objective: LO 3

1. A service level of 95% means there is a 0.95 probability
2. of a stockout.
3. that supply will exceed demand.
4. that demand will be met during the lead time.
5. None of these answer choices is correct.

Difficulty: Moderate
Learning Objective: LO 3

1. A continuous inventory system is also known as a
   1. fixed-time period system
   2. fixed-order quantity system
   3. fixed-lead time system
   4. fixed-amount system

Difficulty: Easy

Learning Objective: LO 3

1. A periodic inventory system is also known as a
   1. fixed-time period system.
   2. fixed-order quantity system.
   3. fixed-lead time system.
   4. fixed-amount system.

Difficulty: Easy

Learning Objective: LO 3

64. 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

1. 62,500 boxes.
2. 10,000 boxes.
3. 5,000 boxes.
4. 2,500 boxes.

Difficulty: Moderate

Learning Objective: LO 4

1. 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.
2. 13
3. 15
4. 20
5. 25

Difficulty: Moderate

Learning Objective: LO 4

1. 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
2. 125 days.
3. 75.3 days.
4. 32.8 days.
5. 29.2 days.

Difficulty: Moderate

Learning Objective: LO 4

1. 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
2. $62,500.
3. $5,000.
4. $2,500.
5. $1,250.

Difficulty: Moderate

Learning Objective: LO 4

1. 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
2. 62,500 boxes.
3. 31,250 boxes.
4. 5,000 boxes.
5. 2,500 boxes.

Difficulty: Moderate

Learning Objective: LO 4

1. 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 is
2. 2,000 units.
3. 4,000 units.
4. 20,000 units.
5. 40,000 units.

Difficulty: Moderate

Learning Objective: LO 4

1. 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.
2. 5
3. 10
4. 15
5. 20

Difficulty: Moderate

Learning Objective: LO 4

1. 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
2. 18.25 days.
3. 24.33 days.
4. 36.5 days.
5. 73 days.

Difficulty: Moderate

Learning Objective: LO 4

1. 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 is
2. $100,000.
3. $50,000.
4. $5,000.
5. $2,500.

Difficulty: Moderate

Learning Objective: LO 4

1. 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 is
2. 20,000 units.
3. 10,000 units.
4. 2,500 units.
5. 1,000 units.

Difficulty: Moderate

Learning Objective: LO 4

1. Which of the following is not an assumption of the EOQ model?
   1. demand is known and constant
   2. no shortages allowed
   3. lead time is determined by quantity ordered
   4. order quantity is received all at once

Difficulty: Moderate

Learning Objective: LO 4

1. The economic order quantity is most widely used for determining how much to order in
   1. a periodic inventory system.
   2. a continuous inventory system.
   3. an on-demand inventory system.
   4. None of these answer choices is correct.

Difficulty: Moderate

Learning Objective: LO 4

1. The quantity discount model considers
   1. purchase price.
   2. carrying cost.
   3. ordering cost.
   4. All of these answer choices are correct.

Difficulty: Easy

Learning Objective: LO 4

1. Which of the following is not an assumption of the EOQ model?
2. demand rate is known and constant
3. shortages are allowed
4. lead time is constant
5. order quantity is received all at once

Difficulty: Moderate

Learning Objective: LO 4

1. From a supplier perspective, the purpose of a quantity discount is to get the customer to buy
   a. more than the economic order quantity.
   b. less than the economic order quantity.
   c. the economic order quantity.
   d. None of these answer choices is correct.

Difficulty: Easy

Learning Objective: LO 4

1. Consider a university that purchases replacement chairs for its classrooms. The purchasing manager knows that the annual demand for replacement chairs is 500. The pricing schedule is as follows:

Order Size Price
100–199 $130
200–499 $122
500+ $120

For the next nine problems, use the following Excel solution to this quantity discount problem with constant carrying cost.

1. What is the economic order quantity?
   a. 100
   b. 115.47
   c. 200
   d. 500
   Difficulty: Moderate
   Learning Objective: LO 4
2. What is the inventory ordering cost using the economic order quantity?
   a. $200
   b. $500
   c. $866
   d. $1,000
   Difficulty: Moderate
   Learning Objective: LO 4
3. What is the carrying cost using the economic order quantity?
   a. $750
   b. $866
   c. $1,500
   d. $3,750
   Difficulty: Moderate
   Learning Objective: LO 4
4. What is the annual purchase cost using the economic order quantity?
   a. $60,000

b. $61,000
c. $65,000
d. None of these answer choices is correct.
Difficulty: Moderate
Learning Objective: LO 4

1. What is the discount order quantity using a purchase price of $130?
   a. 100
   b. 115.47
   c. 200
   d. 500
   Difficulty: Moderate
   Learning Objective: LO 4
2. What is the discount order quantity using a purchase price of $122?
   1. 100
   2. 115.47
   3. 200
   4. 500
      Difficulty: Moderate
      Learning Objective: LO 4

What is the discount order quantity using a purchase price of $120?
a. 100
b. 115.47
c. 200
d. 500
Difficulty: Moderate
Learning Objective: LO 4

1. What is the optimal order quantity?
   a. 100
   b. 115.47
   c. 200
   d. 500
   Difficulty: Moderate
   Learning Objective: LO 4
2. What is the approximate minimum total cost associated with the optimal order quantity?
   a. $66,750
   b. $66,732
   c. $63,950
   d. $63,000
   Difficulty: Moderate
   Learning Objective: LO 4
3. For a quantity discount problem, the order quantity selected is the one that minimizes the total annual _________ cost.
   a. inventory
   b. carrying
   c. ordering
   d. purchase
   Difficulty: Easy

Learning Objective: LO 4

1. 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
2. 3,785 units.
3. 4,500 units.
4. 4,627units.
5. 4,747units.

Difficulty: Moderate

Learning Objective: LO 5

1. 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
   1. 150 units.
   2. 247 units.
   3. 336 units.
   4. 740 units.

Difficulty: Moderate

Learning Objective: LO 5

1. 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 4,650 for this component then its service level is approximately
2. 50 percent.
3. 84 percent.
4. 92 percent.
5. 98 percent.

Difficulty: Moderate

Learning Objective: LO 5

92. 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

1. 8,320 units.
2. 9,218 units.
3. 10,134 units.
4. 11,244 units.

Difficulty: Moderate

Learning Objective: LO 5

93. 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

1. it must decrease its safety stock by approximately 412 units.
2. it must decrease its safety stock by approximately 212 units.
3. it must increase its safety stock by approximately 412 units.
4. it must increase its safety stock by approximately 212 units.

Difficulty: Moderate

Learning Objective: LO 5

Short Answer

1. List several types of uncertainty that may contribute to higher inventory levels.

Difficulty: Moderate

Learning Objective: LO 1

96. Explain the relationship between ordering costs and carrying costs in the economic order quantity (EOQ) model.

Difficulty: Moderate

Learning Objective: LO 4

1. List and discuss the costs used to determine carrying cost, holding cost and shortage cost.

Difficulty: Moderate

Learning Objective: LO 2

1. Briefly compare and contrast a continuous inventory system to a periodic inventory system listing the advantages and disadvantages of each.

Difficulty: Moderate

Learning Objective: LO 3

1. 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: Moderate

Learning Objective: LO 3

1. Make a list of the basic steps involved in using the quantity discount model and discuss each.

Difficulty: Moderate

Learning Objective: LO 4

101. A store carries a popular food item. The average demand for this product is 15 units per day, with a standard deviation of 3.5 units. The stock is checked weekly. Suppose that at one particular occasion when the stock is being checked, there are 5 units in stock. The lead time to receive an order is 3 days. If the store wants to maintain a 95% service level, then the order size for this period is __________.

a) 163

b) 164

c) 166

d) 167

102. A store carries a popular food item. The average demand for this product is 15 units per day, with a standard deviation of 3.5 units. The stock is checked weekly. Suppose that at one particular occasion when the stock is being checked, there are 5 units in stock. The store wants to maintain a 95% service level. If the order size for this period is 180, then the lead time must be __________ days.

a) 2

b) 3

c) 4

d) 5

103. A store carries a popular food item. The average demand for this product is 15 units per day. The stock is checked weekly. Suppose that at one particular occasion when the stock is being checked, there are 5 units in stock. The lead time to receive an order is 5 days, and the store wants to maintain a 95% service level. If the order size for this period is 190, then the standard deviation of the demand must be __________ units.

a) 2

b) 2.5

c) 3

d) 3.5

104. A store carries a popular food item. The stock is checked weekly. At one particular occasion when the stock is being checked, there are 6 units in stock, and the order size for the period is 198. The lead time to receive an order is 4 days, the store wishes to maintain a 95% service level, and the standard deviation of the demand is 3 units. Then the average demand for this product must be __________.

a) 17

b) 16

c) 15

d) 14

105. The annual carrying cost for a product is $115, the ordering cost is $1,150, and the annual demand is estimated to be 1,000 units. The optimal order size with the basic EOQ model is __________ units.

a) 100

b) 101

c) 141

d) 142

106. The annual carrying cost for a product is $115, the ordering cost is $1,150, and the annual demand is estimated to be 1,000 units. The number of orders per year with the basic EOQ model is __________ times.

a) 4

b) 5

c) 6

d) 7

107. The annual carrying cost for a product is $115, the ordering cost is $1,150, and the annual demand is estimated to be 1,000 units. Assume that the company is closed on Sundays, Thanksgiving, and Christmas. The orders cycle (time between orders) with the basic EOQ model is __________ days.

a) 44

b) 43

c) 42

d) 41

108. The annual carrying cost for a consumer product is $115, the ordering cost is $1,150, and the annual demand is estimated to be 1,000 units. This product sells to the consumer at $810 and has an 80% markup. The minimum total inventory cost with the basic EOQ model is $__________.

a) 178,263

b) 178,264

c) 466,263

d) 466,264

109. The annual carrying cost for a consumer product is $115, the ordering cost is $1,150, and the annual demand is estimated to be 1,000 units. This product sells to the consumer at $810 and has an 80% markup. The supplier offers a 20% discount for orders equal to or larger than 150. Should the store take advantage of this discount or should it order the basic EOQ order size? The store should __________.

a) order the basic EOQ order size because the total inventory cost taking advantage of the discount is $376,292, which is larger than the min total inventory cost using EOQ

b) take advantage of the discount, because the associated total inventory cost is $376,292, which is smaller than the min total inventory cost using EOQ

c) order the basic EOQ order size, but if the discount were 25% instead of 20%, it should take advantage of the discount

d) take advantage of the discount, because the associated total inventory cost is $391,292, which is smaller than the min total inventory cost using EOQ

110. The annual carrying cost for a consumer product is $115, the ordering cost is $1,150, and the annual demand is estimated to be 1,000 units. This product sells to the consumer at $810 and has an 80% markup. The supplier offers a discount for orders equal to or larger than 150. What must be the discount offered by the supplier if the total inventory cost taking advantage of the discount is $417,250?

a) 15%

b) 12.5%

c) 11.1%

d) 10.9%