TBApp III

Appendix III
Inventory Management
Multiple Choice Questions
1. Inventory holding costs typically include:
A. clerical costs of purchase-order preparation.
B. costs of deterioration, theft, or spoilage.
C. costs associated with lost sales to customers.
D. forgone interest on money tied up in inventory.
E. both costs of deterioration, theft, or spoilage and forgone interest on money tied up in inventory.
2. Inventory holding costs would typically include all of the following except:
A. insurance.
B. theft.
C. transportation.
D. obsolescence.
E. warehouse rent.
App III-1
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3. Which of the following is classified as an inventory shortage cost?
A. Purchase order preparation.
B. Production disruption.
C. Lost sales and lost customers.
D. Spoilage.
E. Both production disruption and lost sales and lost customers.
4. At the economic order quantity:
A. total annual inventory costs, holding costs, and ordering costs are all minimized.
B. total annual inventory costs and holding costs are minimized.
C. total annual inventory costs are minimized, and holding costs equal ordering costs.
D. total annual inventory costs are minimized, and holding costs exceed ordering costs.
E. total annual inventory costs are minimized, and ordering costs exceed holding costs.
5. Burgoon uses an economic order quantity model and has determined an optimal order size of 500
units. Annual demand is 10,000 units, ordering costs are $50 per order, and holding costs are $4
per unit. The company's annual ordering and holding costs total:
A. $2,000.
B. $3,000.
C. $21,000.
D. $41,000.
E. none of the other answers are correct.
App III-2
6. Cartwright Graphics uses a special purpose paper on 80% of its jobs. The paper is purchased in
100-sheet packages at a cost of $100 per package. Management estimates that the cost of placing
and receiving a typical order is $15, and the annual cost of carrying a package in inventory is $1.50.
Cartwright uses 2,600 packages each year. Production is constant, and the lead time to receive an
order is 1 week.
The economic order quantity is approximately:
A. 203 packages.
B. 225 packages.
C. 228 packages.
D. 565 packages.
E. 631 packages.
100-sheet packages at a cost of $100 per package. Management estimates that the cost of placing
and receiving a typical order is $15, and the annual cost of carrying a package in inventory is $1.50.
Cartwright uses 2,600 packages each year. Production is constant, and the lead time to receive an
order is 1 week.
The reorder point is:
A. 25 packages.
B. 50 packages.
C. 100 packages.
D. 203 packages.
E. 225 packages.
App III-3
8. When comparing EOQ and JIT inventory systems, which of the following statements is false?
A. The EOQ approach takes the viewpoint that some inventory is necessary.
B. The EOQ system assumes a constant order quantity.
C. JIT argues that inventory investments should be minimized.
D. The EOQ system focuses on acquisition and holding costs.
E. JIT argues that safety stocks are necessary to reduce the probability of a stock shortage.
9. Which of the following does not minimize ordering costs when using JIT purchasing?
A. Reducing the number of vendors.
B. Negotiating long-term supply agreements.
C. Making less frequent payments.
D. Maintaining a safety stock.
E. Eliminating inspections.
10. When graphing the EOQ, which of the following statements is false?
A. Holding costs are a downward sloping line to the right.
B. The EOQ is represented by the minimum total cost.
C. Ordering costs are a downward sloping line to the right.
D. Average inventory on hand results in higher holding costs.
E. As order size increases, so does average inventory on hand.
App III-4
11. When considering safety stock and its effect on EOQ, which of the following statements is false?
A. Safety stock is equal to the potential excess usage of an input.
B. The reorder point is affected by the existence of safety stock.
C. Safety stock decreases inventory holding costs.
D. Safety stock decreases the potential costs caused by inventory shortages.
E. Fluctuations in monthly usage of a material indicate the desirability of a safety stock.
Essay Questions
12. Economic Order Quantity, timing of orders and safety stock are three important considerations in
inventory management.
Required:
A. Explain each of these considerations.

B. How is EOQ affected by the timing of orders and safety stock?
App III-5
13. Shields carries a part that is popular in the manufacture of automatic sprayers. Demand for this part
is 4,000 units per year; order costs amount to $30 per order, and holding costs total $1.50 per unit.
The company is considering the implementation of an economic order quantity model in an effort
to better manage its inventories.
Required:
A. Compute the economic order quantity.

B. Compute total annual inventory costs if Shields follows the EOQ policy.
App III-6
14. Shields carries a part that is popular in the manufacture of automatic sprayers. Demand for this part
is 4,000 units per year; order costs amount to $30 per order, and holding costs total $1.50 per unit.
The company, which currently places four orders per year with its suppliers, is considering the
implementation of an economic order quantity (EOQ) model to better manage its inventories.
Preliminary EOQ calculations revealed an optimal order quantity of 400 units and total annual
inventory costs of $600.
Required:
A. In comparison with its current policy, how much will Shields save by adopting the EOQ model?
B. Briefly explain the philosophical difference between the EOQ model and the just-in-time model.
Which of the two models will likely result in lower holding costs for the firm? Why?
App III-7
Appendix III Inventory Management Answer Key
Multiple Choice Questions
1. Inventory holding costs typically include:
A. clerical costs of purchase-order preparation.
B. costs of deterioration, theft, or spoilage.
C. costs associated with lost sales to customers.
D. forgone interest on money tied up in inventory.
E. both costs of deterioration, theft, or spoilage and forgone interest on money tied up in
inventory.
AACSB: Reflective Thinking

AICPA BB: Resource Management
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: III-01 Calculate the economic order quantity (EOQ) using the EOQ decision model.
App III-8
2. Inventory holding costs would typically include all of the following except:
A. insurance.
B. theft.
C. transportation.
D. obsolescence.
E. warehouse rent.

AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
3. Which of the following is classified as an inventory shortage cost?
A. Purchase order preparation.
B. Production disruption.
C. Lost sales and lost customers.
D. Spoilage.
E. Both production disruption and lost sales and lost customers.

AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
App III-9
4. At the economic order quantity:
A. total annual inventory costs, holding costs, and ordering costs are all minimized.
B. total annual inventory costs and holding costs are minimized.
C. total annual inventory costs are minimized, and holding costs equal ordering costs.
D. total annual inventory costs are minimized, and holding costs exceed ordering costs.
E. total annual inventory costs are minimized, and ordering costs exceed holding costs.

AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
5. Burgoon uses an economic order quantity model and has determined an optimal order size of
500 units. Annual demand is 10,000 units, ordering costs are $50 per order, and holding costs
are $4 per unit. The company's annual ordering and holding costs total:
A. $2,000.
B. $3,000.
C. $21,000.
D. $41,000.
E. none of the other answers are correct.
AACSB: Analytic
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
App III-10
100-sheet packages at a cost of $100 per package. Management estimates that the cost of
placing and receiving a typical order is $15, and the annual cost of carrying a package in
inventory is $1.50. Cartwright uses 2,600 packages each year. Production is constant, and the
lead time to receive an order is 1 week.
The economic order quantity is approximately:
A. 203 packages.
B. 225 packages.
C. 228 packages.
D. 565 packages.
E. 631 packages.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
App III-11
100-sheet packages at a cost of $100 per package. Management estimates that the cost of
placing and receiving a typical order is $15, and the annual cost of carrying a package in
inventory is $1.50. Cartwright uses 2,600 packages each year. Production is constant, and the
lead time to receive an order is 1 week.
The reorder point is:
A. 25 packages.
B. 50 packages.
C. 100 packages.
D. 203 packages.
E. 225 packages.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
8. When comparing EOQ and JIT inventory systems, which of the following statements is false?
A. The EOQ approach takes the viewpoint that some inventory is necessary.
B. The EOQ system assumes a constant order quantity.
C. JIT argues that inventory investments should be minimized.
D. The EOQ system focuses on acquisition and holding costs.
E. JIT argues that safety stocks are necessary to reduce the probability of a stock shortage.

AICPA FN: Research
Blooms: Understand
App III-12
Learning Objective: III-02 Understand the differences between the economic-order-quantity and just-in-time approaches to
9. Which of the following does not minimize ordering costs when using JIT purchasing?
A. Reducing the number of vendors.
B. Negotiating long-term supply agreements.
C. Making less frequent payments.
D. Maintaining a safety stock.
E. Eliminating inspections.

AICPA FN: Research
Blooms: Understand
10. When graphing the EOQ, which of the following statements is false?
A. Holding costs are a downward sloping line to the right.
B. The EOQ is represented by the minimum total cost.
C. Ordering costs are a downward sloping line to the right.
D. Average inventory on hand results in higher holding costs.
E. As order size increases, so does average inventory on hand.

AICPA FN: Research
Blooms: Understand
App III-13
11. When considering safety stock and its effect on EOQ, which of the following statements is false?
A. Safety stock is equal to the potential excess usage of an input.
B. The reorder point is affected by the existence of safety stock.
C. Safety stock decreases inventory holding costs.
D. Safety stock decreases the potential costs caused by inventory shortages.
E. Fluctuations in monthly usage of a material indicate the desirability of a safety stock.

AICPA FN: Research
Blooms: Understand
Essay Questions
App III-14
12. Economic Order Quantity, timing of orders and safety stock are three important considerations
in inventory management.
Required:
A. Explain each of these considerations.

B. How is EOQ affected by the timing of orders and safety stock?
A. EOQ is a mathematical model that minimizes the costs of ordering and holding inventory.
Timing of orders takes into account any lead time necessary between placing and receiving the
inventory ordered. Safety stock allows for fluctuations in usage and minimizes losses due to lost
production.
B. The need for a lead time when placing orders and maintenance of a safety stock will alter the
selection of the EOQ. Proper weighting of the three will result in cost minimization by the
company.

AICPA FN: Research
Blooms: Understand
App III-15
13. Shields carries a part that is popular in the manufacture of automatic sprayers. Demand for this
part is 4,000 units per year; order costs amount to $30 per order, and holding costs total $1.50
per unit. The company is considering the implementation of an economic order quantity model
in an effort to better manage its inventories.
Required:
A. Compute the economic order quantity.

B. Compute total annual inventory costs if Shields follows the EOQ policy.
A. The EOQ can be figured by taking the square root of: (2 x annual requirement x cost per
order) ÷ annual holding cost per unit. The square root of (2 x 4,000 x $30) ÷ $1.50, or 160,000, is
400.
B. The ordering cost is based on 10 orders (4,000 units ÷ 400 units) x $30, and totals $300; the
holding cost is computed on the company's average inventory of 200 units (400 ÷ 2) and
amounts to $300 (200 x $1.50). Thus, costs at the EOQ total $600 ($300 + $300).
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
App III-16
14. Shields carries a part that is popular in the manufacture of automatic sprayers. Demand for this
part is 4,000 units per year; order costs amount to $30 per order, and holding costs total $1.50
per unit.
The company, which currently places four orders per year with its suppliers, is considering the
implementation of an economic order quantity (EOQ) model to better manage its inventories.
Preliminary EOQ calculations revealed an optimal order quantity of 400 units and total annual
inventory costs of $600.
Required:
A. In comparison with its current policy, how much will Shields save by adopting the EOQ
model?
B. Briefly explain the philosophical difference between the EOQ model and the just-in-time
model. Which of the two models will likely result in lower holding costs for the firm? Why?
A. Shields is currently ordering four times each year, resulting in order costs of $120 ($30 x 4).
Each order is for 1,000 units (4,000 ÷ 4), which gives rise to an average inventory of 500 units
(1,000 ÷ 2) and holding costs of $750 (500 x $1.50). Total costs under the current policy are $870
($120 + $750), and the EOQ produces a $270 savings for the company ($870 - $600).
B. The EOQ model assumes that some inventory is necessary for business operations, and the
goal is to optimize the order quantity to produce a situation where ordering costs equal holding
costs. In contrast, under JIT, holding inventory in a warehouse is deemed to be inefficient and
wasteful. Thus, inventory should be minimized and even eliminated, if possible.
Inventory under a JIT system is typically lower and, thus, holding costs are lower with this
approach.
AACSB: Analytic
App III-17
Blooms: Apply
Difficulty: 3 Hard
App III-18

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Appendix III

Multiple Choice Questions

1. Inventory holding costs typically include:

A. clerical costs of purchase-order preparation.

B. costs of deterioration, theft, or spoilage.

C. costs associated with lost sales to customers.

D. forgone interest on money tied up in inventory.

A. Purchase order preparation.

C. Lost sales and lost customers.

E. Both production disruption and lost sales and lost customers.

4. At the economic order quantity:

B. total annual inventory costs and holding costs are minimized.

E. none of the other answers are correct.

The economic order quantity is approximately:

The reorder point is:

B. The EOQ system assumes a constant order quantity.

C. JIT argues that inventory investments should be minimized.

D. The EOQ system focuses on acquisition and holding costs.

A. Reducing the number of vendors.

B. Negotiating long-term supply agreements.

C. Making less frequent payments.

D. Maintaining a safety stock.

A. Holding costs are a downward sloping line to the right.

B. The EOQ is represented by the minimum total cost.

C. Ordering costs are a downward sloping line to the right.

D. Average inventory on hand results in higher holding costs.

E. As order size increases, so does average inventory on hand.

A. Safety stock is equal to the potential excess usage of an input.

B. The reorder point is affected by the existence of safety stock.

C. Safety stock decreases inventory holding costs.

D. Safety stock decreases the potential costs caused by inventory shortages.

E. Fluctuations in monthly usage of a material indicate the desirability of a safety stock.

A. Explain each of these considerations.

A. Compute the economic order quantity.

Multiple Choice Questions

1. Inventory holding costs typically include:

A. clerical costs of purchase-order preparation.

B. costs of deterioration, theft, or spoilage.

C. costs associated with lost sales to customers.

D. forgone interest on money tied up in inventory.

AACSB: Reflective Thinking

AACSB: Reflective Thinking

3. Which of the following is classified as an inventory shortage cost?

A. Purchase order preparation.

C. Lost sales and lost customers.

E. Both production disruption and lost sales and lost customers.

AACSB: Reflective Thinking

B. total annual inventory costs and holding costs are minimized.

AACSB: Reflective Thinking

E. none of the other answers are correct.

The economic order quantity is approximately:

The reorder point is:

B. The EOQ system assumes a constant order quantity.

C. JIT argues that inventory investments should be minimized.

D. The EOQ system focuses on acquisition and holding costs.

AACSB: Reflective Thinking

A. Reducing the number of vendors.

B. Negotiating long-term supply agreements.

C. Making less frequent payments.

D. Maintaining a safety stock.

AACSB: Reflective Thinking

A. Holding costs are a downward sloping line to the right.

B. The EOQ is represented by the minimum total cost.

C. Ordering costs are a downward sloping line to the right.