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ch13 Key

1. One important use of inventories in manufacturing is to decouple


operations through the use of work in process inventories. TRUE
Decoupling operations is an important use of inventories.
2. The objective of inventory management is to minimize the cost of holding
inventory. FALSE
The objective of inventory management is to allow satisfactory customer
service while keeping costs down.
3. A retail store that carries twice the inventory as its competitor will provide
twice the customer service level. FALSE
There is a limit to how high service level can go; if the competitor's service
level is 90%, the retailer can't double that.
4. The overall objective of inventory management is to achieve satisfactory
levels of customer service while keeping inventory costs reasonable. TRUE
This is the overall objective of inventory management.
5. The two main concerns of inventory control relate to the costs and the
level of customer service. TRUE
These are the essential facets of inventory control.
6. To provide satisfactory levels of customer service while keeping inventory
costs within reasonable bounds, two fundamental decisions must be made
about inventory: the timing and size of orders. TRUE
These are the fundamental decisions regarding inventory control.
8. DVD recorders would be an example of independent demand items. TRUE
Components of the DVD recorders would be dependent demand items.
9. Reorder point models are primarily used for dependent demand items.
FALSE
Reorder point models are primarily used for independent demand items.
10. An example of inventory holding cost is the cost of moving goods to
temporary storage after receipt from a supplier. FALSE
These are ordering costs.
11. Decoupling operations applies to the railroad industry. FALSE
Decoupling refers to buffering operations in manufacturing.
12. Interest, insurance, and opportunity costs are all associated with holding
costs. TRUE
These are holding costs.

13. The A-B-C approach involves classifying inventory items by unit cost, with
expensive items classified as A' items and low cost items classified as C'
items. FALSE
A-B-C approach classifies inventory according to some measure of
importance.
14. An inventory buffer adds value and lowers cost in all supply chains.
FALSE
Many buffers increase costs across supply chains.
15. In the A-B-C approach, C items typically represent about 15 percent of
the number of items, but 60 percent of the dollar usage. FALSE
C items typically represent about 60 percent of the number of items and
about 15 percent of the dollar usage.
16. EOQ inventory models are basically concerned with the timing of orders.
FALSE
EOQ models are concerned with the size of orders.
17. The average inventory level is inversely related to order size. FALSE
The average inventory level is positively related to order size.
18. The average inventory level and the number of orders per year are
inversely related: As one increases, the other decreases. TRUE
These are inversely related.
19. The EOQ should be regarded as an approximate quantity rather than an
exact quantity. Thus, rounding the calculated value is acceptable. TRUE
The total cost function is relatively flat, so rounding costs little.
20. Carrying cost is a function of order size; the larger the order, the higher
the inventory carrying cost. TRUE
Larger order quantities lead to higher inventory carrying cost.
21. Understocking an inventory item is a sure sign of inadequate inventory
control. FALSE
Having an occasional stockout is not necessarily a sign of inadequate
inventory control.
22. Annual ordering cost is inversely related to order size. TRUE
Annual ordering cost decreases as order size increases.
23. The total cost curve is relatively flat near the EOQ. TRUE
Thus approximating the EOQ can be a very good solution.

24. Because price isn't a factor in the EOQ formula, quantity discounts won't
affect EOQ calculations. FALSE
If quantity discounts are offered, the EOQ might vary based on different
holding costs.
25. In the quantity discount model, if holding costs are given as a percentage
of unit price, a graph of the total cost curves will have the same EOQ for
each curve. FALSE
Total cost curves will differ across the price levels.
26. In the quantity discount model, the optimum quantity will always be
found on the lowest total cost curve. FALSE
The optimum quantity might actually be when the discount is passed up.
27. ROP models indicate to managers the time between orders. FALSE
ROP models indicate when, with regard to on-hand inventory, orders should
be placed.
28. When to order can be calculated by the ROP and expressed as a quantity.
TRUE
ROP models indicate when, with regard to on-hand inventory, orders should
be placed.
29. The rate of demand is an important factor in determining the ROP. TRUE
The demand rate multiplied by the lead time is a major part of the ROP.
30. The inventory value of the supply chain exceeds the inventory value of
the organization's work in process inventory. TRUE
There can be raw materials and finished goods inventory at the organization.
Other organizations in the supply chain will have inventories, too.
31. Safety stock is held because we anticipate future demand. FALSE
Safety stock is held because we anticipate fluctuations in future demand or
in lead time.
32. Variability in demand and/or lead time can be compensated for by safety
stock. TRUE
Safety stock can be used to accommodate these.
33. Solving quality problems can lead to lower inventory levels. TRUE
Leaning out the organization can be facilitated by solving quality problems.
34. ROP models assume that demand during lead time is composed of a
series of dependent daily demands. FALSE
ROP models assume that demand during lead time is composed of a series of
independent daily demands.

35. Profit margins tend to be inversely related to inventory turns. TRUE


This is typically the case.
36. In the fixed-order interval model, the order size is the same for each
order. FALSE
Order size varies from order to order in a fixed-order interval model.
37. The fixed-order interval model requires a continuous monitoring of
inventory levels. FALSE
The fixed-order interval model leads to periodic monitoring of inventory
levels.
38. Discrete stocking levels are used when an organization doesn't want
visibility of inventory levels. FALSE
Discrete stocking refers to having to stock a discrete number of units.
39. The fixed-order interval model requires a larger amount of safety stock
than the ROP model for the same risk of a stockout. TRUE
Fixed-order intervals typically carry more safety stock.
40. The single-period model can be very helpful in determining when to
order. FALSE
The single-period model helps determine how many to order.
41. The single-period model can be very helpful in determining how much to
order. TRUE
The single-period model helps determine how many to order.
42. Monitoring inventory turns over time can be used as a measure of
performance. TRUE
Greater turnover often implies better performance.
43. A single-period model would be used mainly by organizations going out
of business. FALSE
The single-period model applies to many regularly occurring circumstances.
44. The basic EOQ model ignores the purchasing cost. TRUE
Only if quantity discounts are offered does purchasing cost enter into EOQ
analysis.
45. When the item is offered for resale, shortage costs in the single-period
model can include a charge for loss of customer goodwill. TRUE
Greater loss of goodwill would equate with a higher shortage cost.

46. In the single-period model, the service level is the probability that
demand will not exceed the stocking level in any period. TRUE
If demand exceeds the stocking level, a stockout as occurred.
47. A quantity discount will lower the reorder point. FALSE
The reorder point is independent of quantity discounts.
48. It is critical that the exact quantity calculated in the EOQ model be
ordered. FALSE
Because the total cost curve is flat, modest rounding of the EOQ is
permissible.
49. Safety stock eliminates all stock outs. FALSE
Safety stock only ensures that a given likelihood of stock outs.
50. The calculation of safety stock requires knowledge of demand and lead
time variability. TRUE
Both of these play a role in the calculation of safety stock.
51. The two basic issues in inventory are how much to order and when to
order. TRUE
Quantity and timing are the two basic issues in inventory management.
52. Cycle counting can be used in motorcycle inventory control. TRUE
Cycle counting can also be used in automobile inventory control.
53. Using the EOQ model, the higher an item's carrying costs, the more
frequently it will be ordered. TRUE
As carrying costs increase, the optimal order quantity decreases.
54. The cycle time represents the time between reorder point and receipt of
order. FALSE
The cycle time represents the time between orders.
55. The cost of placing an order is a function of order size. FALSE
The cost of placing an order is typically unrelated to order size.
56. All stock outs must be avoided. FALSE
Most of the time it would be too costly to avoid all stockouts.
57. In the basic EOQ model, annual holding cost is one-half of the total
annual cost for all items purchased. FALSE
Annual holding cost equals half the product of the order quantity and the perunit-per-year holding cost.
58. Quantity discounts are generally given for large number of orders. FALSE

Quantity discounts are given for smaller, but larger, orders.


59. The larger the number of orders placed, the larger the average level of
inventory. FALSE
More orders means smaller quantities, which means lower average inventory.
60. Which of the following is not one of the assumptions of the basic EOQ
model? A. Annual demand requirements are known and constant. B. Lead
time does not vary. C. Each order is received in a single delivery. D. Quantity
discounts are available. E. All of the above are necessary assumptions.
In the basic EOQ model quantity discounts are not available.
61. Which of the following interactions with vendors would potentially lead to
inventory reductions? A. reduce lead times B. increase safety stock C. less
frequent purchases D. larger batch quantities E. longer order intervals
Reducing lead times would have the effect of reducing safety stock
requirements and therefore reducing inventories.
62. A non-linear cost related to order size is the cost of: A. interest B.
insurance C. taxes D. receiving E. space
Receiving cost is a non-linear cost associated with order size.
63. In a two-bin inventory system, the amount contained in the second bin is
equal to the: A. ROP B. EOQ C. amount in the first bin D. optimum stocking
level E. safety stock
The second bin equals the amount needed during lead time in addition to
any safety stock.
64. When carrying costs are stated as a percentage of unit price, the
minimum points on the total cost curves: A. Line up B. Equal zero C. Do not
line up D. Cannot be calculated E. Depend on the percentage assigned
Curves aren't symmetrical if holding cost differs across price breaks.
65. Dairy items, fresh fruit and newspapers are items that: A. do not require
safety stocks B. cannot be ordered in large quantities C. are subject to
deterioration and spoilage D. require that prices be lowered every two days
E. have minimal holding costs
Deterioration and spoilage increase holding costs.
66. Which of the following is least likely to be included in order costs? A.
processing vendor invoices for payment B. moving delivered goods to
temporary storage C. inspecting incoming goods for quantity D. taking an
inventory to determine how much is needed E. temporary storage of
delivered goods
Storage costs are holding costs.

67. In an A-B-C system, the typical percentage of the number of items in


inventory for A items is about: A. 10 B. 30 C. 50 D. 70 E. 90
Class A items represent a relatively small portion of items.
68. In the A-B-C classification system, items which account for fifteen percent
of the total dollar-volume for a majority of the inventory items would be
classified as: A. A items B. B items C. C items D. A items plus B items E. B
items plus C items
These would be class C items.
69. In the A-B-C classification system, items which account for sixty percent
of the total dollar-volume for few inventory items would be classified as: A. A
items B. B items C. C items D. A items plus B items E. B items plus C items
These would be class A items.
70. The purpose of "cycle counting" is to: A. count all the items in inventory
B. count bicycles and motorcycles in inventory C. reduce discrepancies
between inventory records and actual D. reduce theft E. count 10% of the
items each month
Cycle counting is intended to improve inventory record accuracy.
71. The EOQ model is most relevant for which one of the following? A.
ordering items with dependent demand B. determination of safety stock C.
ordering perishable items D. determining fixed interval order quantities E.
determining fixed order quantities
The EOQ is a fixed-quantity approach.
72. Which is not a true assumption in the EOQ model? A. Production rate is
constant B. Lead time doesn't vary C. No more than 3 items are involved D.
Usage rate is constant E. No quantity discounts
EOQ can be used across multiple items.
73. In a supermarket, a vendor's restocking the shelves every Monday
morning is an example of: A. safety stock replenishment B. economic order
quantities C. reorder points D. fixed order interval E. blanket ordering
This would be a weekly interval model.
74. A cycle count program will usually require that A' items be counted: A.
daily. B. once a week. C. monthly. D. quarterly. E. more frequently than
annually.
Class A items are counted more frequently.
75. A risk avoider would want ______ safety stock. A. Less B. More C. The
same D. Zero E. 50%
Greater risk aversion is associated with more safety stock.

76. In the basic EOQ model, if annual demand doubles, the effect on the EOQ
is: A. It doubles. B. It is four times its previous amount. C. It is half its
previous amount. D. It is about 70 percent of its previous amount. E. It
increases by about 40 percent.
The EOQ does not increase linearly with demand.
77. In the basic EOQ model, if lead time increases from five to 10 days, the
EOQ will: A. double B. increase, but not double C. decrease by a factor of two
D. remain the same E. none of the above
The EOQ is independent of lead time.
81. Which of the following is not true for Economic Production Quantity
model? A. Usage rate is constant. B. Production rate exceeds usage rate. C.
Run size exceeds maximum inventory. D. There are no ordering or setup
costs. E. Average inventory is one-half maximum inventory.
There are ordering or setup costs in the EPQ model.
82. Given the same demand, setup/ordering costs, and carrying costs, the
EOQ calculated using incremental replenishment will be ____________ if
instantaneous replenishment was assumed: A. greater than the EOQ B.
equal to the EOQ C. smaller than the EOQ D. greater than or equal to the
EOQ E. smaller than or equal to the EOQ
The EPQ will be smaller than the EOQ.
83. The introduction of quantity discounts will cause the optimum order
quantity to be: A. smaller B. unchanged C. greater D. smaller or unchanged
E. unchanged or greater
Quantity discounts cannot make the optimum quantity be smaller.
84. A fill rate is the percentage of _____ filled by stock on hand. A. Shipments
B. Demand C. Inventory D. Safety stock E. Lead time
The fill rate is the percentage of demand filled directly from on-hand
inventory.
85. In the quantity discount model, with carrying cost stated as a percentage
of unit purchase price, in order for the EOQ of the lowest curve to be
optimum, it must: A. have the lowest total cost B. be in a feasible range C.
be to the left of the price break quantity for that price D. have the largest
quantity compared to other EOQ's E. none of the above
If not feasible, that quantity will have to be adjusted upward and then total
cost calculated.
86. Which one of the following is not generally a determinant of the reorder
point? A. rate of demand B. length of lead time C. lead time variability D.
stockout risk E. purchase cost
Purchase cost does not enter into reorder point calculations.

87. If no variations in demand or lead time exist, the ROP will equal: A. the
EOQ B. expected usage during lead time C. safety stock D. the service level
E. the EOQ plus safety stock
The ROP will be the demand rate times the lead time.
89. Which one of the following is implied by a "lead time" service level of 95
percent? A. Approximately 95 percent of demand during lead time will be
satisfied. B. Approximately 95 percent of inventory will be used during lead
time. C. The probability is 95 percent that demand during lead time will
exactly equal the amount on hand at the beginning of lead time. D. The
probability is 95 percent that demand during lead time will not exceed the
amount on hand at the beginning of lead time. E. none of the above
A stock only occurs if demand during lead time exceeds the ROP.
90. Which one of the following is implied by an "annual" service level of 95
percent? A. Approximately 95 percent of demand during lead time will be
satisfied. B. The probability is 95 percent that demand will exceed supply
during lead time. C. The probability is 95 percent that demand will equal
supply during lead time. D. The probability is 95 percent that demand will not
exceed supply during lead time. E. None of the above.
The annual service level is usually greater than the cycle service level, and
thus the risk of a stockout during lead time is much smaller than 5 percent.
93. All of the following are possible reasons for using the fixed order interval
model except: A. Supplier policy encourages use. B. Grouping orders can
save in shipping costs. C. The required safety stock is lower than with an
EOQ/ROP model. D. It is suited to periodic checks of inventory levels rather
than continuous monitoring. E. Continuous monitoring is not practical.
Safety stock is higher in a fixed order interval model.
94. Which of these products would be most apt to involve the use of a singleperiod model? A. gold coins B. hammers C. fresh fish D. calculators E. frozen
corn
The perishability of fresh fish makes it more appropriate for a single-period
model.
95. In a single-period model, if shortage and excess costs are equal, then the
optimum service level is: A. 0 B. .33 C. .50 D. .67 E. none of these
The ratio of shortage cost to shortage plus excess cost is 0.5.
96. In a single-period model, if shortage cost is four times excess cost, then
the optimum service level is ___ percent. A. 100 B. 80 C. 60 D. 40 E. 20
The ratio of shortage cost to shortage plus excess cost is 0.8.

97. In the single-period model, if excess cost is double shortage cost, the
approximate stockout risk, assuming an optimum service level, is ___
percent. A. 100 B. 67 C. 50 D. 33 E. 5
The ratio of shortage cost to shortage plus excess cost is 0.67.
99. The management of supply chain inventories focuses on: A. internal
inventories B. external inventories C. both internal and external inventories
D. safety stock elimination E. optimizing reorder points
Supply chain inventory involves both internal and external inventories.
100. An operations strategy for inventory management should work towards:
A. increasing lot sizes B. decreasing lot sizes C. increasing safety stocks D.
decreasing service levels E. increasing order quantities
If lot sizes can be reduced, operations become leaner.
101. Cycle stock inventory is intended to deal with ________. A. excess costs
B. shortage costs C. stockouts D. expected demand E. quantity discounts
Cycle stock is intended to deal with expected demand, while safety stock is
intended to reduce stockouts resulting from demand uncertainty.
102. An operations strategy which recognizes high carrying costs and
reduces ordering costs will result in: A. unchanged order quantities B. slightly
decreased order quantities C. greatly decreased order quantities D. slightly
increased order quantities E. greatly increased order quantities
Processes will be leaned leading to smaller order quantities.
103. The need for safety stocks can be reduced by an operations strategy
which: A. increases lead time B. increases lead time variability C. increases
lot sizes D. decreases ordering costs E. decreases lead time variability
Reduced lead time variability will reduce the size of safety stocks.
105. With an A-B-C system, an item that had a high demand but a low annual
dollar volume would probably be classified as: A. A B. B C. C D. none of these
Low dollar volume items tend to be classified as C items.
106. The fixed order interval model would be most likely to be used for this
situation: A. A company has switched from mass production to lean
production. B. Production is done in batches. C. Spare parts are ordered when
a new machine is purchased. D. Grouping orders can save shipping costs. E.
none of these
If ordering costs can be saved by grouping orders, the fixed order interval
model is especially attractive.
107. Which item would be least likely to be ordered under a fixed order
interval system? A. textbooks at a college bookstore B. auto parts at an

assembly plant C. cards at a gift shop D. canned peas at a supermarket E.


none of these
Auto parts at an assembly plant would be unlikely candidates for a fixed
order interval system.
108. Which one of these would not be a factor in determining the reorder
point? A. the EOQ B. the lead time C. the variability of demand D. the
demand or usage rate E. all are factors
The ROP is independent of the EOQ.

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