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File: ch13, Chapter 13: Inventory Management

True/False

1. Inventory management is concerned with how much to order and when to order. Ans: True Difficulty: Moderate Feedback: The Elements of Inventory Management

2. Dependent demand items are typically products for use by the final customer. Ans: False Difficulty: Moderate Feedback: The Elements of Inventory Management

3. Dependent demand items consist of component parts or materials used in the production process to produce a final product.. Ans: True Difficulty: Moderate Feedback: The Elements of Inventory Management

4. As the level of inventory increases to provide better customer service quality-related customer service costs decreases. Ans: True Difficulty: Moderate Feedback: Inventory Control Systems

5. The three basic costs associated with inventory are holding costs, ordering costs and shortage costs. Ans: True

Difficulty: Moderate Feedback: The Elements of Inventory Management

6. Product deterioration, spoilage, breakage, and obsolescence are examples of shortage costs. Ans: False Difficulty: Moderate Feedback: The Elements of Inventory Management

7. Shortage costs are easier to determine than carrying costs or ordering costs. Ans: False Difficulty: Moderate Feedback: The Elements of Inventory Management

8. Continuous inventory systems often incorporate information technology to improve the speed and accuracy of data entry and retrieval. Ans: True Difficulty: Moderate Feedback: Inventory Control Systems

9. The ABC classification system is a method for classifying inventory based on the percentage of total value and the percentage of total quantity. Ans: True Difficulty: Moderate Feedback: Inventory Control Systems

10. Class A items in the ABC classification system require less monitoring and control than Class C items. Ans: False Difficulty: Moderate Feedback: Inventory Control Systems

11. The economic order quantity (EOQ) model determines the optimal order size that minimizes total annual inventory costs. Ans: True Difficulty: Moderate Feedback: Economic Order Quantity Models

12. A quantity discount is a price discount available if a predetermined number of units is ordered. Ans: True Difficulty: Moderate Feedback: Quantity Discounts

13. The reorder point is the level of inventory that promts a new order to be placed in a continuous inventory system. Ans: True Difficulty: Moderate Feedback: Inventory Control Systems

14. The time between orders is variable and the order quantity is constant in the periodic inventory system. Ans: False Difficulty: Moderate Feedback: Inventory Control Systems

15. Seasonal inventory allows a firm to maintain a smooth production flow throughout the year. Ans: True Difficulty: Easy Feedback: The Role of Inventory in Supply Chain Management

16. Hedging involves buying larger amounts of inventory in anticipation of future price increases. Ans: True Difficulty: Moderate Feedback: The Role of Inventory in Supply Chain Management

17. Inventory can take the form of tools and equipment. Ans: True Difficulty: Moderate Feedback: The Role of Inventory in Supply Chain Management

18. Buffer inventories provide independence between different stages of the production process. Ans: True Difficulty: Moderate Feedback: The Role of Inventory in Supply Chain Management.

19. The conventional approach to inventory management is to maintain a level of inventory that reflects a compromise between inventory cost and customer service. Ans: True Difficulty: Moderate Feedback: Inventory and Quality Management in the Supply Chain

20. Dependent demand is determined by external market conditions. Ans: False Difficulty: Moderate Feedback: The Elements of Inventory Management

21. Finished product is an example of a dependent demand item. Ans: False Difficulty: Easy Feedback: The Elements of Inventory Management

22. Carry costs and ordering costs are inversely related. Ans: True Difficulty: Moderate Feedback: The Elements of Inventory Management

23. For a given annual demand, total annual ordering cost is independent of order size. Ans: False Difficulty: Hard Feedback: Economic Order Quantity Models

24. Carrying costs are more difficult to determine than ordering or shortage costs. Ans: False Difficulty: Easy Feedback: The Elements of Inventory Management

25. Continuous inventory systems are primarily intended for lower cost items because they are easier to use requiring fewer resources. Ans: False Difficulty: Moderate Feedback: Inventory Control Systems

26. Continuous inventory systems are also referred to as a fixed-order-quantity system. Ans: True Difficulty: Moderate Feedback: Inventory Control Systems

27. Periodic inventory systems initiate a new order when the level of inventory falls to the reorder to point. Ans: False Difficulty: Moderate Feedback: Inventory Control Systems

28. In ABC analysis, each class of inventory requires different levels of inventory monitoring and control. Ans: True Difficulty: Moderate Feedback: Inventory Control Systems

29. The EOQ model determines the optimal order size that minimizes the sum of carrying cost and shortage costs. Ans: False Difficulty: Easy Feedback: Economic Order Quantity Models

30. The order cycle is the time between receipts of orders in an inventory cycle.. Ans: True Difficulty: Easy Feedback: Economic Order Quantity Models

31. The number of orders can be calculated by dividing the daily demand rate, d, by the order quantity, Q. Ans: False Difficulty: Moderate Feedback: Economic Order Quantity Models

32. The average inventory can be calculated by dividing the annual demand, D, by 2. Ans: False Difficulty: Easy Feedback: Economic Order Quantity Models

33. The economic order quantity occurs when the annual carrying cost is equal to the annual ordering cost. Ans: True Difficulty: Easy Feedback: Economic Order Quantity Models

34. With the economic order quantity (EOQ) model ,the number of orders increases as the order size decreases. Ans: True Difficulty: Moderate Feedback: Economic Order Quantity Models

35. With the economic order quantity (EOQ) model, increasing the order quantity reduces inventory carrying cost. Ans: False Difficulty: Moderate Feedback: Economic Order Quantity Models

36. The production quantity model, a variation of the basic EOQ model, assumes noninstantaneous replenishment. Ans: True Difficulty: Hard Feedback: Economic Order Quantity Models

37. 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. Ans: False Difficulty: Easy Feedback: Economic Order Quantity Models

38. When demand is uncertain, a safety stock is often added to the expected demand during lead time to prevent a stockout. Ans: True Difficulty: Moderate Feedback: Reorder Point

39. Maintaining a desired service level influencing the level of safety stock. Ans: True Difficulty: Moderate Feedback: Reorder Point

40. The order quantity for a periodic inventory system remains constant. Ans: False Difficulty: Easy Feedback: Inventory Control Systems

41. The periodic inventory system is often preferred for high quantity, low value items. Ans: True Difficulty: Easy Feedback: Inventory Control Systems

Multiple Choice

42. Which of the following is NOT an assumption of the EOQ model?

a) b) c) d)

demand rate is known and constant shortages are allowed lead time is constant order quantity is received all at once

Ans: b. Difficulty: Moderate Feedback: Economic Order Quantity Models

43. ___________ demand items are used in the process of producing a final product. a. Dependent b. Independent c. Seasonal d. Cyclical Ans: a Difficulty: Moderate Feedback: The Elements of Inventory Management

44. 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 Ans: c Difficulty: Moderate Feedback: Inventory and Quality Management

45. Receiving, handling and shipping costs are examples of a. shortage costs. b. carrying costs. c. ordering costs. d. none of the above. Ans: c Difficulty: Moderate Feedback: The Elements of Inventory Management

46. 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. Ans: a Difficulty: Moderate Feedback: The Elements of Inventory Management

47. The _______________ classification system classifies inventory according to its dollar value to the firm. a. periodic b. continuous c. ABC d. EOQ Ans: c Difficulty: Moderate Feedback: Inventory Control Systems

48. 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. Ans: d Difficulty: Moderate Feedback: Inventory Control Systems

49. 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. Ans: c Difficulty: Moderate Feedback: Economic Order Quantity Models

50. 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. is a. b. c. d. 13 15 20 25

Ans: a Difficulty: Moderate Feedback: Economic Order Quantity Models

a. b. c. d.

51. 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 125 days. 75.3 days. 32.8 days. 29.2 days.

Ans: d Difficulty: Moderate Feedback: Economic Order Quantity Models

52. 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. Ans: b Difficulty: Moderate Feedback: Economic Order Quantity Models

a. b. c. d.

53. 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 62500 boxes. 31,250 boxes. 5,000 boxes. 2,500 boxes.

Ans: d Difficulty: Moderate Feedback: Economic Order Quantity Models

a. b. c. d.

54. 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 companys reorder point for this component is approximately 3785 units. 4500 units. 4627units. 4747units.

Ans: d Difficulty: Moderate Feedback: Reorder Point

55. 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 companys safety stock for this component is approximately a. 150 units. b. 247 units. c. 336 units.

d. 740 units. Ans: b Difficulty: Moderate Feedback: Reorder Point

a. b. c. d.

56. 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 50 percent. 84 percent. 92 percent. 98 percent..

Ans: b Difficulty: Moderate Feedback: Reorder Point

57. A products 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. Ans: a Difficulty: Moderate Feedback: Reorder Point

58. A products usage is normally distributed with a weekly average demand of 2,000 units and a weekly standard deviation of 125. The products 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.

Ans: d Difficulty: Moderate Feedback: Reorder Point

a. b. c. d.

59. 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 2,000 units. 4,000 units. 20,000 units. 40,000 units.

Ans: a Difficulty: Moderate Feedback: Economic Order Quantity Models

a. b. c. d.

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 ________ orders are placed annually. 5 10 15 20

Ans: d Difficulty: Moderate Feedback: 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 the time between orders (order

a. b. c. d.

cycle time) is 18.25 days. 24.33 days. 36.5 days. 73 days.

Ans: a Difficulty: Moderate Feedback: Economic Order Quantity Models

a. b. c. d.

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 its total annual inventory cost for this product would be $100,000. $50,000. $5,000. $2,500.

Ans: c Difficulty: Moderate Feedback: Economic Order Quantity Models

a. b. c. d.

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 average inventory level for this product would be 20,000 units. 10,000 units. 2,500 units. 1,000 units.

Ans: d Difficulty: Moderate Feedback: Economic Order Quantity Models

64. 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. Ans: a Difficulty: Moderate Feedback: The Role of Inventory in Supply Chain Management

65. 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. Ans: b Difficulty: Easy Feedback: Inventory and Quality Management in the Supply Chain

66. Which of the following is not considered a form of inventory? a. items being transported b. tools and equipment c. supplies d. backorders Ans: d Difficulty: Easy Feedback: The Elements of Inventory Management

67. 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. Ans: c Difficulty: Moderate

Feedback: The Elements of Inventory Management

68. 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 Ans: b Difficulty: Easy Feedback: The Elements of Inventory Management

69. 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. Ans: a Difficulty: Easy Feedback: The Elements of Inventory Management

70. Which of the following is not an assumption of the EOQ model? a. demand is known and constant. b. no shortages allowed. c. lead time is determined by quantity ordered. d. order quantity is received all at once. Ans: c Difficulty: Moderate Feedback: Economic Order Quantity Models

71. 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.

Ans: b Difficulty: Moderate Feedback: Economic Order Quantity Models

72. The quantity discount model considers a. purchase price. b. carrying cost. c. ordering cost. d. all the above. Ans: d Difficulty: Easy Feedback: Economic Order Quantity Models

Short Answer

73. Explain the relationship between ordering costs and carrying costs in the economic order quantity (EOQ) model. Ans: Ordering costs react inversely to carrying costs. As the size of the order increases, fewer orders are required, reducing ordering costs. However, ordering larger amounts results in higher inventory levels and higher carrying costs. In general, as the order size increases, ordering costs decrease and carrying costs increase. Difficulty: Moderate Feedback: The Elements of Inventory Management

74. Briefly compare and contrast a continuous inventory system to a periodic inventory system listing the advantages and disadvantages of each. Ans: There are two basic types of inventory systems: a continuous (or fixed-orderquantity) system and a periodic (or fixed-time-period) system. In a continuous system, an order is placed for the same constant amount whenever the inventory on hand decreases to a certain level, whereas in a periodic system, an order is placed for a variable amount after the passage of a specific period of time. A positive feature of a continuous system is that the inventory is continuously monitored, so management always knows the inventory status. This is advantageous for critical items such as replacement parts or supplies. However, maintaining a continual record of the inventory on hand can also be costly. In

the periodic inventory system the inventory level is not monitored at all during the time interval between orders, so it has the advantage of little or or required record keeping. The disadvantage is less direct control which typically results in larger inventory levels for a periodic inventory system than in a continuous system to guard against unexpected stockouts early in the fixed period. Difficulty: Moderate Feedback: Inventory Control Systems

75. List several types of uncertainty that may contribute to higher inventory levels. Ans: -receive poor quality materials from supplier -produce quality defects in the production system -unanticipated changes in demand -poor forecasts -variations in delivery times -variations in lead times -uncertain production schedules

76. List and discuss the costs used to determine carrying cost., holding cost and shortage cost. Ans: -facility storage (rent, depreciation, utilities, security, taxes, insurance) -material handling equipment -labor -record keeping -cost of working capital -product deterioration (spoilage, breakage, obsolescence, pilferage)

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. Ans: The continuous inventory system provides for greater monitoring and control. If the economic order quantity is used total annual inventory cost is minimized. This system is best suited for high value, low quantity items. The periodic inventory system provides no monitoring and minimal control. It requires almost no record keeping. This system is best suited for low value, high quantity items.

78. Make a list of the basic steps involved in using the quantity discount model and discuss each. Ans: First calculate the economic order quantity. Based on this quantity determine the price based on this order size. Calculate the total annual inventory cost which includes carrying cost, ordering costs and purchasing cost. Determine the minimal quantity that qualifies for the next price discount. Using this quantity and the new price calculate the total annual inventory cost which includes carrying cost, ordering costs and purchasing cost. Repeat the last step for all quantity/price

options. Select the order size, Q, with the lowest total annual cost.