Test Bank Answers Managing Inventories Chapter 7

Chapter 07 Test Bank

Multiple Choice Questions

1. Safety stock exists for which of the following reasons?

A. To allow less expensive purchases by buying more.

B. To allow for transportation time.

C. To provide protection against the uncertainties of supply and demand.

D. None of these selections.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 07-01 Define the different types and roles of inventory in the supply chain.
Topic: Types and Roles of Inventory

2. Which of the following is NOT a role of inventory?

A. Increasing quality of finished goods

B. Balancing supply and demand

C. Buffering uncertainty in supply or demand

D. Enabling geographical specialization

AACSB: Reflective Thinking
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Accessibility: Screen Reader Compatible
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 07-01 Define the different types and roles of inventory in the supply chain.
Topic: Types and Roles of Inventory

3. A batch of Raisin Bran that has been made at Kellogg's but not yet packaged in its final cereal box would be an example of what type of inventory?

A. Raw material

B. Work in process

C. Finished goods

D. Maintenance, repair, and operating supplies (MRO)

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 07-01 Define the different types and roles of inventory in the supply chain.
Topic: Types and Roles of Inventory

4. Ball Corporation sells aluminum cans to Anheuser-Busch to use in making six-packs of Budweiser. Anheuser-Busch has a warehouse located at its plant in St. Louis that contains boxes of empty cans received from Ball. From Anheuser-Busch's perspective, the cans in this warehouse represent:

A. Raw materials and components inventory.

B. Work in process inventory.

C. Finished goods inventory.

D. MRO inventory.

AACSB: Reflective Thinking
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Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 07-01 Define the different types and roles of inventory in the supply chain.
Topic: Types and Roles of Inventory

5. Taxes and insurance costs are an example of which of the following costs?

A. Ordering cost.

B. Governmental costs.

C. Carrying (or holding) costs.

D. None of these selections.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 07-02 Explain the financial impact of inventory on firm performance.
Topic: The Financial Impact of Inventory

6. John Jones of Jones Corporation determined that the cost related to processing an invoice from a supplier was approximately $100 per invoice. This cost is an example of:

A. Inventory holding (or carrying) cost.

B. Inventory investment.

C. Wasted expense.

D. Order cost.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 07-02 Explain the financial impact of inventory on firm performance.
Topic: The Financial Impact of Inventory

7. Johnson Company had beginning inventory of $1,000,000 and ending inventory of $1,200,000. Johnson has determined inventory carrying cost to be 25 percent. Johnson's inventory carrying cost was:

A. $250,000.

B. $275,000.

C. $300,000.

D. $500,000.

AACSB: Analytical Thinking
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Blooms: Analyze
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 07-02 Explain the financial impact of inventory on firm performance.
Topic: The Financial Impact of Inventory

8. Suppose demand is 45 units a month, average inventory is 60 units, and unit cost is $20. What is the annual inventory turnover?

A. 10

B. 9

C. 0.75

D. 15

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-03 Explain and compute asset productivity and customer service-related measures of inventory performance.
Topic: Measures of Inventory Performance

9. If beginning inventory is $1,000,000, ending inventory is $1,400,000, sales are $10,000,000, and anticipated sales are $50,000 per day, what is the days of supply?

A. 28 days

B. 70 days

C. 60 days

D. 32 days

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-03 Explain and compute asset productivity and customer service-related measures of inventory performance.
Topic: Measures of Inventory Performance

10. Natalie's Cabinets makes cabinets at an average cost of $2,000. Last year, Natalie sold 5,000 units of the cabinets and had an annual turnover rate of four times. Natalie has estimated her inventory carrying cost to be 25 percent. What was Natalie's annual inventory carrying cost?

A. $625,000

B. $250,000

C. $312,500

D. $125,000

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-03 Explain and compute asset productivity and customer service-related measures of inventory performance.
Topic: Measures of Inventory Performance

11. Next year a tire company wants to have an inventory turnover rate of 22 times per year. To achieve this turnover rate, what should be the average number of days of supply?

A. 16.6 days

B. 36 days

C. 0.6 days

D. 22 days

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-03 Explain and compute asset productivity and customer service-related measures of inventory performance.
Topic: Measures of Inventory Performance

12. Independent demand inventory models can be used to determine:

A. When to buy and how much to buy.

B. Safety stock levels.

C. Stock levels for regular and one-time buys.

D. All of these selections.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 07-04 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.
Topic: Inventory Management Systems

13. Jones Manufacturing Inc. purchases a component from a Chilean supplier. The demand for that component is exactly 70 units each day. The company is open for business 250 days each year. When the company reorders the product, the lead time from the supplier is exactly 10 days. The product costs $14.00. The company determined that its inventory carrying cost is 20 percent. The company's order cost is $30.00. If the company decides to order 1,750 units each time it places an order, what will be the total annual cost of this policy? (Do not include the product cost in your answer.)

A. $1,500

B. $2,400

C. $2,750

D. $3,400

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-04 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.
Topic: The Continuous Review Model

14. University Bookstore buys women's polo T-shirts from a supplier according to the price schedule shown below. The store sells 500,000 T-shirts each year. The annual carrying cost of T-shirts is 25 percent, and the ordering cost is $40.

What order quantity would give the bookstore the lowest total acquisition cost? (Due to possible differences in rounding, choose the closest answer.)

A. 2,139

B. 2,237

C. 2,500

D. 2,614

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-04 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.
Topic: The Continuous Review Model

15. University Bookstore buys women's polo T-shirts from a supplier according to the price schedule shown below. The store sells 500,000 T-shirts each year. The annual carrying cost of T-shirts is 25 percent, and the ordering cost is $40.

The lowest total annual acquisition cost for the bookstore quantity is closest to: (Due to possible differences in rounding, choose the closest answer.)

A. $16,018,000

B. $16,018,708

C. $17,518,707

D. $16,258,000

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-04 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.
Topic: The Continuous Review Model

16. Alpha Company places 10 orders per year with its supplier. Each order is for an amount exactly equal to the EOQ. Alpha's order cost has been determined to be $50 per order. Alpha carries no safety stock at all. What is Alpha's annual inventory carrying cost?

A. Cannot be determined without further information

B. $50

C. $250

D. $500

AACSB: Reflective Thinking
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-04 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.
Topic: The Continuous Review Model

17. Alpha Company places 10 orders per year with its supplier. Each order is for an amount exactly equal to the EOQ. Alpha has determined its annual inventory carrying cost is $2,000. Alpha carries no safety stock at all. What is Alpha's order cost per order?

A. Cannot be determined without further information

B. $2,000

C. $200

D. $1,500

AACSB: Reflective Thinking
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-04 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.
Topic: The Continuous Review Model

18. Jones Company has calculated that the EOQ for a particular item is 1,000 units. However, Jones does not have enough capital to order that many units each time, so it only orders 250 units at a time. This will result in:

A. Higher annual inventory carrying cost than ordering the EOQ quantity.

B. Lower annual inventory carrying cost than ordering the EOQ quantity.

C. Lower annual ordering cost than ordering the EOQ quantity.

D. Cannot be determined.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 07-07 Describe practical techniques for improving inventory planning and management.
Topic: The Continuous Review Model

19. Blue Star Co. has been using the production order quantity inventory model. If annual demand, daily demand, and the production rate increase to four times their original amounts, which of the following is/a possible consequence?

A. The order quantity will double.

B. The order quantity will increase by four times.

C. The order quantity will be cut in half.

D. There is no impact on order quantity.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Evaluate
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-04 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.
Topic: The Continuous Review Model

20. Bryson Carpet Mills produces a variety of different carpets. Changing from production of one carpet to another involves a setup cost of $500. One particular carpet costs $8/yard to produce. Annual demand for this style is 50,000 yards. Bryson Mills produces carpet 200 days per year. The production process is most efficient when 2,000 yards/day are produced. Inventory carrying cost is estimated at 20 percent annually. What should be the production order quantity?

A. 4,675 yards

B. 5,976 yards

C. 8,750 yards

D. 2,500 yards

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-04 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.
Topic: The Continuous Review Model

21. A company has average demand of 30 units per day. Lead time from the supplier averages seven days. Assume that the combined standard deviation of demand during lead time has been calculated and is equal to 20 units. One unit costs $10 and the inventory carrying cost is 25 percent.

1 standard deviation covers 84.13%

1.04 standard deviations covers 85%

1.28 standard deviations covers 90%

1.65 standard deviations covers 95%

1.96 standard deviations covers 97.5%

2 standard deviations covers 97.72%

2.33 standard deviations covers 99%

3 standard deviations covers 99.86%

6 standard deviations covers 99.99966%

Suppose management decides it wants to offer a 95 percent service level. That is, it is willing to experience a stockout probability of 5 percent during the order cycle. What is the annual cost of this safety stock policy?

A. $82.50

B. $87.50

C. $115.00

D. $62.50

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-05 Determine the cost of a company's service level policy.
Topic: The Continuous Review Model

22. A company has average demand of 30 units per day. Lead time from the supplier averages seven days. Assume that the combined standard deviation of demand during lead time has been calculated and is equal to 20 units. One unit costs $10 and the inventory carrying cost is 25 percent.

1 standard deviation covers 84.13%

1.04 standard deviations covers 85%

1.28 standard deviations covers 90%

1.65 standard deviations covers 95%

1.96 standard deviations covers 97.5%

2 standard deviations covers 97.72%

2.33 standard deviations covers 99%

3 standard deviations covers 99.86%

6 standard deviations covers 99.99966%

What is the reorder point for the company if it decides on a 99 percent service level?

A. 243 units

B. 257 units

C. 77 units

D. 210 units

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-04 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.
Topic: The Continuous Review Model

23. HighLife Corporation has the following information:

Average demand = 30 units per day

Average lead time = 40 days

Item unit cost = $45 for orders of less than 400 units

Item unit cost = $40 for orders of 400 units or more

Ordering cost = $50

Inventory carrying cost = 15 percent

The business year is 300 days.

Standard deviation of demand during lead time = 90

Desired service level = 95 percent

What is the EOQ if HighLife pays $45/unit? Due to possible differences in rounding, choose the closest answer.

A. 287

B. 300

C. 365

D. 398

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-04 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.
Topic: The Continuous Review Model

24. HighLife Corporation has the following information:

Average demand = 30 units per day

Average lead time = 40 days

Item unit cost = $45 for orders of less than 400 units

Item unit cost = $40 for orders of 400 units or more

Ordering cost = $50

Inventory carrying cost = 15 percent

The business year is 300 days.

Standard deviation of demand during lead time = 90

Desired service level = 95 percent

What is the TAC at $40/unit? (Pick the number closest to the correct answer.)

A. $351,750

B. $362,325

C. $355,840

D. $362,240

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-04 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.
Topic: The Continuous Review Model

25. HighLife Corporation has the following information:

Average demand = 30 units per day

Average lead time = 40 days

Item unit cost = $45 for orders of less than 400 units

Item unit cost = $40 for orders of 400 units or more

Ordering cost = $50

Inventory carrying cost = 15 percent

The business year is 300 days.

Standard deviation of demand during lead time = 90

Desired service level = 95 percent

What is the safety stock that HighLife Corporation should carry for its desired service level of 95 percent?

1.28 standard deviations cover 90 percent

1.65 standard deviations cover 95 percent

1.96 standard deviations cover 97.5 percent

A. 149

B. 90

C. 86

D. 112

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 07-05 Determine the cost of a company's service level policy.
Topic: The Continuous Review Model

26. A company recently lowered its service performance from 99 percent product availability to 97 percent product availability. The change saved the company exactly $1 million per year in inventory carrying cost. Senior management now wants to lower the service level to 95 percent from 97 percent. Such a further change is likely to save:

A. Less than $1 million.

B. Exactly $1 million.

C. More than $1 million.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-05 Determine the cost of a company's service level policy.
Topic: The Continuous Review Model

27. When calculating a reorder point (ROP), which of the following factors WOULD NOT affect the calculation?

A. Item's EOQ.

B. Delivery lead time.

C. Demand during the delivery lead time.

D. Standard deviation of demand during delivery lead time.

E. All of these would affect the ROP.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 07-04 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.
Topic: The Continuous Review Model

28. Which of the following statements is true regarding a periodic review inventory system?

A. Safety stock is not needed when periodic review systems are used.

B. The same quantity of inventory is ordered each time an order is placed.

C. Inventory replenishment orders are placed in equal increments of time.

D. None of the selections are true.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 07-04 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.
Topic: The Periodic Review Model

29. Bill's Food Emporium uses the periodic system to order cans of Cajun seasoning every 30 days. It typically takes the supplier 10 days to resupply Bill. Sales average eight units per day with a standard deviation of two units per day. Bill does not carry any safety stock of Cajun seasoning. If he runs out for a period of time, he doesn't care. Bill just counted his inventory of Cajun seasoning and found 22 cans on the shelf. How many cans should Bill order?

A. 342

B. 218

C. 262

D. 298

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-04 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.
Topic: The Periodic Review Model

30. Jasper's Grocery places an order for Monster every 15 days. Once the order is placed, delivery to the store typically occurs in three days. Average demand is five cases per day, and the standard deviation of demand is 1.5 cases per day. The store policy is to stock an amount of inventory that allows for an average stockout condition of 5 percent (1.65 standard deviations) while waiting for replenishment. It is time to place an order, and there are 20 cases on hand. How many units should be ordered?

A. 90 cases

B. 80 cases

C. 75 cases

D. 86 cases

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-04 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.
Topic: The Periodic Review Model

31. You have a one-time opportunity to buy an item. It costs $20 and sells for $50. It has $4 salvage value if it does not sell. What is the target service level?

A. 50 percent

B. 65.21 percent

C. 80 percent

D. 66.67 percent

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-04 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.
Topic: Single Period Inventory Model

32. At each of its home games, the Washington Check-Kiters football team sells programs that give statistics of the teams involved in the current game's contest. Since each game brings a different visiting team, a program is only of value for one contest, and no returns will be accepted by the supplier. On a per-program basis, the selling price is twice the cost. The target service level that will yield the most profits is:

A. 33 percent

B. 50 percent

C. 67 percent

D. 75 percent

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-04 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.
Topic: Single Period Inventory Model

33. Johnson Manufacturing has decided to consolidate its warehouses and reduce the number of locations from 12 to four. However, Johnson desires to maintain the same service level in terms of the risks of running out of stock in attempting to meet customer demand. As a result, Johnson can expect that:

A. The time to fill customer orders will decrease.

B. The required safety stock will increase by approximately 73 percent.

C. The required safety stock will decline by approximately 42 percent.

D. The required safety stock will decline by approximately 58 percent.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-06 Explain the advantages and disadvantages of different inventory location strategies.
Topic: Impact of Location on Inventory Requirements

34. What might a company do to reduce the amount of cycle stock it holds?

A. Attempt to reduce supplier lead time.

B. Always take advantage of supplier quantity discounts.

C. Attempt to reduce demand variation.

D. Attempt to reduce order costs.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 07-07 Describe practical techniques for improving inventory planning and management.
Topic: Managing Inventory Across the Supply Chain

35. Which of the following might a company try to do to reduce the total amount of safety stock it holds?

A. Implement and use ABC analysis of inventory items.

B. Attempt to reduce variation in supplier lead times.

C. Implement demand management approaches.

D. All of these selections.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 07-07 Describe practical techniques for improving inventory planning and management.
Topic: Managing Inventory Across the Supply Chain

36. The ABC analysis used for analyzing inventory is an example of:

A. Safety stock calculation.

B. Regression analysis.

C. Pareto's law.

D. Inventory carrying cost.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 07-07 Describe practical techniques for improving inventory planning and management.
Topic: Managing Inventory

37. ___________ inventory is the costliest form of inventory one can hold.

A. Finished goods

B. Raw materials

C. Components

D. Work-in-process

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 07-07 Describe practical techniques for improving inventory planning and management.
Topic: Managing Inventory Across the Supply Chain

38. When small changes generated by a customer produce progressively larger changes at each stage upstream in the supply chain, this is known as:

A. Buffering.

B. Bullwhip effect.

C. Pareto effect.

D. Supplier-managed inventory.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 07-07 Describe practical techniques for improving inventory planning and management.
Topic: Managing Inventory Across the Supply Chain

39. Which of the following is NOT often associated with supplier-managed inventory (SMI) arrangements?

A. Long-term commitments from both parties.

B. Supplier representative located at the customer site.

C. Customers recommend to suppliers how they should schedule production.

D. Supplier places replenishment orders.

E. All of these are typically associated with SMI.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 07-07 Describe practical techniques for improving inventory planning and management.
Topic: Managing Inventory Across the Supply Chain

40. A difference between periodic review and continuous review inventory systems is:

A. Periodic review is more expensive than continuous review

B. Continuous review usually requires more safety stock than periodic review

C. In one system, time triggers orders; in the other, quantity triggers orders

D. Periodic review requires real-time monitoring systems

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-04 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.
Topic: The Periodic Review Model

41. A retail store’s average sales are $100,000 per week. On average it holds $500,000 worth of inventory valued at cost to the retailer. The retailer’s average pricing includes a mark-up of 30 percent. The retailer’s annual inventory turnover is:

A. 0.2

B. 10.4

C. 13.5

D. 8

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-03 Explain and compute asset productivity and customer service-related measures of inventory performance.
Topic: Measures of Inventory Performance

42. You have a one-time opportunity to buy an item. It costs $50 and sells for $100. It’s disposal value equals its salvage value. What is the target service level?

A. 50 percent

B. 25 percent

C. 80 percent

D. 66.67 percent

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-04 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.
Topic: Single Period Inventory Model

43. Suppose a chief supply chain officer takes the total of all purchasing managers’ annual salaries and divides this number by the number of purchase orders placed in a year. This calculation would provide insight into what kind of inventory cost?

A. Purchasing costs

B. Ordering costs

C. Holding costs

D. System management costs

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 07-03 Explain and compute asset productivity and customer service-related measures of inventory performance.
Topic: Measures of Inventory Performance

44. Texas Manufacturing has decided to triple the number of distribution centers it operates around North America in order to locate inventories within 500 miles of each major city. What effects should they expect?

A. The time to fill customer orders will increase.

B. Inventory holding costs will triple.

C. Total operating costs for the distribution centers will decrease.

D. The required safety stock will increase.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-06 Explain the advantages and disadvantages of different inventory location strategies.
Topic: Impact of Location on Inventory Requirements

45. Jay’s Café orders cans of beans every two weeks. It typically takes the supplier two days to fulfill the order. Jay uses five cans per day on average, with a standard deviation of two units per day. Assume that Jay wants to have a 50 percent service level on the availability of beans. There are currently fifteen cans of beans in Jay’s inventory. How many cans should Jay order?

A. 90

B. 70

C. 75

D. 65

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-04 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.
Topic: The Periodic Review Model

46. General Hospital uses disposable diapers at a rate of 200 per day, with a standard deviation of 20. To place and receive a replenishment of diapers from the third-party logistics provider typically takes three days. The hospital never wants to run out of diapers, so it holds enough safety stock to ensure 99.9 percent availability. Hospital purchasing managers order diapers along with other items every 30 days. It is time to place an order, and there are 800 diapers on hand. How many units should be ordered? (Pick the closest answer.)

A. 5,800

B. 5,852

C. 5,252

D. 5,817

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-04 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.
Topic: The Periodic Review Model

47. Suppose you are positioning “meals ready to eat” (MREs) for humanitarian aid in an area prone to experiencing hurricanes. If a hurricane occurs, the number of MREs that might be demanded by affected residents of the area is normally distributed with a mean of 10,000 and a standard deviation of 500. MREs cost $1 each to purchase and store. In the event of a hurricane, unused MREs are unlikely to be needed again before they spoil, in which case they must be disposed of at a cost of $0.25 per MRE. If during a hurricane there are not enough stored MREs to meet people’s needs, then more MREs can be purchased and quickly shipped in to the site at a cost of $8 each. How many MREs should you preposition in anticipation of a hurricane? (Pick the number closest to the correct answer.)

A. 11,000

B. 10,980

C. 10,520

D. 10,640

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-04 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.
Topic: Single Period Inventory Model

48. Steve’s shop sells seashells by the seashore. Steve buys shells from local collectors for an average price of $0.50 per shell. Steve sells on average 1,000 shells each month. Each time he orders shells from collectors, there is a $20 shipping and handling fee. Steve estimates a unit holding cost of $0.50 per shell per year (many of them get broken if held in inventory too long). How often should Steve order seashells?

A. about three times per month

B. about one time each month

C. about one time every other month

D. about one time each year

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-04 Calculate inventory policy parameters to minimize total acquisition cost in continuous review, periodic review, and single period models.
Topic: The Continuous Review Model

49. Steve’s shop sells seashells by the seashore. Steve desires to offer at least a 90 percent in-stock availability of shells for his customers. He sells 40 shells each day on average, with a standard deviation of 20. When he orders replenishments of shells, it typically takes one day for the supplier to deliver, with a standard deviation of one day. If Steve’s holding cost is $0.50 per shell per year, how much money will he spend each year in holding costs in order to provide a 90 percent service level? (Pick the number closest to the correct answer.)

A. $13

B. $29

C. $58

D. $125

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-05 Determine the cost of a company's service level policy.
Topic: Determining a Service Level Policy

50. The main advantage of blockchain over conventional ways to manage transactions across supply chain partners is: 

A. Unnecessary transactions are blocked from occurring.

B. There is no need for a central authority to validate transactions.

C. Blockchains are easy to construct.

D. Legal documents are no longer required.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 07-07 Describe practical techniques for improving inventory planning and management.
Topic: Managing Inventory Across the Supply Chain

51. Suppose your company decides to create a more “service-oriented” distribution network by doubling the number of independently operated stores located around the country. Assuming demands are spread equally across the stores and inventory policies continue to be optimized, how much would you expect total cycle and safety stocks to increase? (Pick the nearest answer.)

A. 250 percent

B. 100 percent

C. 40 percent

D. 25 percent

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 07-06 Explain the advantages and disadvantages of different inventory location strategies.
Topic: Impact of Location on Inventory Requirements

Chapter 07 Test Bank - Static Summary