Unit 2

Management of Conversion System

Chapter 10: Inventory Management
Lesson 31 - Tutorial 9

Good Morning students, today we are going to have a tutorial session

for the previous lesson. The overall objective is to appreciate how the
theoretical concepts are translated and applied into practical business
situations. We would start with a few problems to review our conceptual
understanding and wind up the session with a well designed case study.
I hope the session results into value addition for all of us.
Let’s put our thinking caps and start now.

1. A use of inventory is
(a) to decouple production and distribution processes
(b) to provide a hedge against inflation
(c) to enable an organization to take advantage of quantity
discounts
(d) all the above

2. ABC analysis divides on-hand inventory into three classes based upon
(a) unit price
(b) the number of units on hand
(c) annual demand
(d) annual rupee value

3. Cycle counting
(a) Provides a measure of inventory turnover
(b) Assumes that all inventory records must be verified with the
same frequency
(c) Is a process by which inventory records are periodically
verified
 (d) All of the above

4. The service industry is improving inventory management by a number

of ways. These include:
(a) Shrinkage and pilferage
(b) Good personal selection
(c) Bar coding of incoming and outgoing merchandise
(d) a and b above
(e) b and c above

5. Annual holding costs are often in the range of

(a) Under 6% of inventory value
(b) 6% to 9% of inventory value
(c) 9% to 12% of inventory value
(d) 12% to 15% of inventory value
(e) over 15% of inventory value

6. For most items in inventory, yearly holding costs amount to only a

few percent of the unit cost.
(a) True
(b) False

7. The major advantage of cycle counting is

(a) Accurate inventory
(b) Dispensing with the annual physical inventory
(c) The audit activity that accompanies cycle counting
(d) None of the above
(e) All of the above

8. Inventory models under conditions of dependent demand are quite

different from those under conditions of independent demand
(a) True
(b) False

9. In an EOQ model, the reorder point is determined by the average

demand during the lead time.
(a) True
(b) False
10. The difference(s) between the basic EOQ model and the production
order quantity model is (are) that
(a) the production order quantity model does not require the
assumption of known, constant demand
(b) the EOQ model does not require the assumption of negligible
lead time
(c) the production order quantity model does not require the
assumption of instantaneous delivery
(d) all of the above

11. Extra units held in inventory to reduce stockouts are called

(a) reorder point
(b) safety stock
(c) just-in-time inventory
(d) all of the above

12. Inventory record accuracy can be improved by

(a) cycle counting
(b) reorder points
(c) ABC analysis
(d) All of the above

13. The two most important inventory-based questions answered by the

typical inventory model are
(a) When to place an order and what is the cost of the order
(b) when to place an order and how much of an item to order
(c) how much of an item to order and what is the cost of the order
(d) how much of an item to order and with whom should the order
be placed

14. The appropriate level of safety stock is typically determined by

(a) minimizing an expected stockout cost
(b) choosing the level of safety stock that assures a given service
level
(c) carrying sufficient safety stock so as to eliminate all stockouts

15. Item X is a standard item stocked in a company’s inventory of

component parts. Each year the firm, on a random basis, uses about
2000 of item X, which costs Rs25 each. Storage costs, which include
insurance and cost of capital, amount to Rs5 per unit of average
 inventory. Every time an order is placed for more item X, it costs
Rs10.
(a) Whenever item X is ordered, what should the order size be?
(b) What is the annual cost for ordering item X?
(c) What is the annual cost for storing item X?

Dear students, with this I would like to conclude the today’s tutorial. I
hope it has been a great learning process for all of you and that this
exercise has resulted in immense value addition.