Chap 013

Chapter 13 - Inventory Control

Chapter 13Inventory Control

Learning Objectives for Chapter 13:

1. Explain the different purposes for keeping inventory.2. Understand that the type of inventory system logic that is

appropriate for an item depends on the type of demand for that item.

3. Calculate the appropriate order size when a one-time purchase must be made

4. Describe what the economic order quantity is and how to calculate it.

5. Summarize fixed–order quantity and fixed–time period models, including ways to determine safety stock when there is variability in demand.

6. Discuss why inventory turn is directly related to order quantity and safety stock.

True / False Questions

1. Inventory is defined as the stock of any item or resource used in an organization. True False

2. An inventory system is a set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be. True False

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3. One of the basic purposes of inventory analysis in manufacturing and stockkeeping services is to specify when items should be ordered. True False

4. One of the basic purposes of inventory analysis in manufacturing and stockkeeping services is to determine the level of quality to specify. True False

5. One of the basic purposes of inventory analysis in manufacturing and stockkeeping services is to determine how large the orders to vendors should be. True False

6. In inventory models, high holding costs tend to favor high inventory levels. True False

7. In inventory models, high holding costs tend to favor low inventory levels and frequent replenishment. True False

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8. If the cost to change from one product to another were zero the lot size would be very small. True False

9. Shortage costs are precise and easy to measure. True False

10. Dependent demand inventory levels are usually managed by calculations using calculus-driven, cost-minimizing models. True False

11. The fixed-time period inventory system has a smaller average inventory than the fixed-order quantity system because it must also protect against stockouts during the review period when inventory is checked. True False

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12. The fixed-order quantity inventory model favors less expensive items because average inventory is lower. True False

13. The fixed-order quantity inventory model is more appropriate for important items such as critical repair parts because there is closer monitoring and therefore quicker response to a potential stockout. True False

14. The fixed-order quantity inventory model requires more time to maintain because every addition or withdrawal is logged. True False

15. Fixed-order quantity inventory models are "event triggered." True False

16. Fixed-order quantity inventory models are "time triggered." True False

17. Fixed-time period inventory models are "event triggered." True False

18. Fixed-time period inventory models are "time triggered." True False

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19. Fixed-order quantity inventory systems determine the order point, R and the order quantity, Q values. True False

20. The computation of a firm's inventory position is found by taking the inventory on hand and adding it to the on-order inventory, and then subtracting back-ordered inventory. True False

21. Using the probability approach we assume that the demand for inventory over a period of time is normally distributed. True False

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22. Safety stock can be defined as the amount of inventory carried in addition to the expected demand. True False

23. If demand for an item is normally distributed we plan for demand to be twice the average demand and carry 2 standard deviations worth of safety stock inventory. True False

24. Safety stock can be computed when using the fixed-order quantity inventory model by multiplying a "z" value representing the number of standard deviations to achieve a service level or probability by the standard deviation of daily demand. True False

25. Safety stock can be computed when using the fixed-order quantity inventory model by multiplying a "z" value representing the number of standard deviations to achieve a service level or probability by the standard deviation of lead time. True False

26. The key difference between a fixed-order quantity inventory model, where demand is known and one where demand is uncertain is in computing the reorder point. True False

27. Fixed-time period inventory models generate order quantities that vary from time period to time period, depending on the usage rate. True False

28. Fixed-order quantity systems assume a random depletion of inventory, with less than an immediate order when a reorder point is reached. True False

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29. The standard fixed-time period model assumes that inventory is never counted but determined by EOQ measures. True False

30. Safety stock is not necessary in any fixed-time period system. True False

31. In the fixed-time period model it is necessary to determine the inventory currently on hand to calculate the size of the order to place with a vendor. True False

32. Some inventory situations involve placing orders to cover only one demand period or to cover short-lived items at frequent intervals. True False

33. The optimal stocking decision in inventory management, when using marginal analysis, occurs at the point where the benefits derived from carrying the next unit are more than the costs for that unit. True False

34. When stocked items are sold, the optimal inventory decision using marginal analysis is to stock that quantity where profit from the sale or use of the last unit is equal to or greater than the losses if the last unit remains unsold. True False

35. Cycle counting is a physical inventory-taking technique in which inventory is counted on a frequent basis rather than once or twice a year. True False

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36. The "sawtooth effect," named after turn-around artist Al "chainsaw" Dunlap, is the severe reduction of inventory and service levels that occurs when a firm has gone through a hostile takeover. True False

37. The "sawtooth effect," is named after the jagged shape of the graph of inventory levels over time. True False

38. Price-break models deal with the fact that the selling price of an item varies with the order size. True False

39. Price-break models deal with the fact that the selling price of an item generally increases as the order size increases. True False

40. Price-break models deal with discrete or step changes in price as order size changes rather than a per-unit change. True False

41. In a price break model of lot sizing, to find the lowest-cost order quantity, it is necessary to calculate the economic order quantity for each possible price. True False

42. In a price break model of lot sizing, to find the lowest-cost order quantity, it is necessary to calculate the economic order quantity for each possible price and to check to see whether the lowest cost quantity is feasible. True False

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43. In a price break model of lot sizing the lowest cost quantity is always feasible. True False

Multiple Choice Questions

44. Which of the following is not one of the categories of manufacturing inventory? A. Raw materialsB. Finished productsC. Component partsD. Just-in-timeE. Supplies

45. Which of the following is one of the categories of manufacturing inventory? A. Economic Order InventoryB. Work-in-processC. Quality unitsD. JIT InventoryE. Re-order point

46. Firms keep supplies of inventory for which of the following reasons? A. To maintain dependence of operationsB. To provide a feeling of security for the workforceC. To meet variation in product demandD. To hedge against wage increasesE. In case the supplier changes the design

47. Which of the following is not a reason to carry inventory? A. To provide a safeguard for variation in raw material delivery timeB. To take advantage of economic purchase-order sizeC. To maintain independence of operationsD. To meet variation in product demandE. To keep the stock out of the hands of competitors

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48. When developing inventory cost models, which of the following is not included as costs to place an order? A. Phone callsB. TaxesC. ClericalD. Calculating quantity to orderE. Postage

49. When material is ordered from a vendor, which of the following is not a reason for delays in the order arriving on time? A. Normal variation in shipping timeB. A shortage of material at the vendor's plant causing backlogsC. An unexpected strike at the vendor's plantD. A lost orderE. Redundant ordering systems

50. Which of the following is not included as an inventory holding cost? A. Annualized cost of materialsB. HandlingC. InsuranceD. PilferageE. Storage facilities

51. Which of the following is usually included as an inventory holding cost? A. Order placingB. BreakageC. Typing up an orderD. Quantity discountsE. Annualized cost of materials

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52. In making any decision that affects inventory size, which of the following costs do not need to be considered? A. Holding costsB. Setup costsC. Ordering costsD. Fixed costsE. Shortage costs

53. Which of the following are fixed-order quantity inventory models? A. Economic order quantity modelB. The ABC modelC. Periodic replenishment modelD. Cycle counting modelE. P model

54. Which of the following are fixed-time period inventory models? A. The EOQ modelB. The least cost methodC. The Q modelD. Periodic system modelE. Just-in-time model

55. Which of the following is a perpetual system for inventory management? A. Fixed-time periodB. Fixed-order quantityC. P modelD. First-in-first-outE. The wheel of inventory

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56. Which of the following is an assumption of the basic fixed-order quantity inventory model? A. Lead times are averagedB. Ordering costs are variableC. Price per unit of product is constantD. Back orders are allowedE. Stock-out costs are high

57. Which of the following is not an assumption of the basic fixed-order quantity inventory model? A. Ordering or setup costs are constantB. Inventory holding cost is based on average inventoryC. Diminishing returns to scale of holding inventoryD. Lead time is constantE. Demand for the product is uniform throughout the period

58. Which of the following is the symbol used in the textbook for the cost of placing an order in the fixed-order quantity inventory model? A. CB. TCC. HD. QE. S

59. Which of the following is the set of all cost components that make up the fixed-order quantity total annual cost (TC) function? A. Annual purchasing cost, annual ordering cost, fixed costB. Annual holding cost, annual ordering cost, unit costC. Annual holding cost, annual ordering cost, annual purchasing costD. Annual lead time cost, annual holding cost, annual purchasing costE. Annual unit cost, annual set up cost, annual purchasing cost

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60. Assuming no safety stock, what is the re-order point (R) given an average daily demand of 50 units, a lead time of 10 days and 625 units on hand? A. 550B. 500C. 715D. 450E. 475

61. Assuming no safety stock, what is the re-order point (R) given an average daily demand of 78 units and a lead time of 3 days? A. 421B. 234C. 78D. 26E. 312

62. If annual demand is 12,000 units, the ordering cost is $6 per order and the holding cost is $2.50 per unit per year, which of the following is the optimal order quantity using the fixed-order quantity model? A. 576B. 240C. 120.4D. 60.56E. 56.03

63. If annual demand is 50,000 units, the ordering cost is $25 per order and the holding cost is $5 per unit per year, which of the following is the optimal order quantity using the fixed-order quantity model? A. 909B. 707C. 634D. 500E. 141

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64. If annual demand is 35,000 units, the ordering cost is $50 per order and the holding cost is $0.65 per unit per year, which of the following is the optimal order quantity using the fixed-order quantity model? A. 5,060B. 2,320C. 2,133D. 2,004E. 1,866

65. Using the fixed-order quantity model, which of the following is the total ordering cost of inventory given an annual demand of 36,000 units, a cost per order of $80 and a holding cost per unit per year of $4? A. $849B. $1,200C. $1,889D. $2,267E. $2,400

66. A company is planning for its financing needs and uses the basic fixed-order quantity inventory model. Which of the following is the total cost (TC) of the inventory given an annual demand of 10,000, setup cost of $32, a holding cost per unit per year of $4, an EOQ of 400 units, and a cost per unit of inventory of $150? A. $1,501,800B. $1,498,200C. $500,687D. $499,313E. None of the above

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67. A company has recorded the last five days of daily demand on their only product. Those values are 120, 125, 124, 128, and 133. The time from when an order is placed to when it arrives at the company from its vendor is 5 days. Assuming the basic fixed-order quantity inventory model fits this situation and no safety stock is needed, which of the following is the reorder point (R)? A. 120B. 126C. 630D. 950E. 1,200

68. A company has recorded the last six days of daily demand on a single product they sell. Those values are 37, 115, 93, 112, 73, and 110. The time from when an order is placed to when it arrives at the company from its vendor is 3 days. Assuming the basic fixed-order quantity inventory model fits this situation and no safety stock is needed, which of the following is the reorder point (R)? A. 540B. 270C. 115D. 90E. 60

69. Using the probability approach to determine an inventory safety stock and wanting to be 95 percent sure of covering inventory demand, which of the following is the number of standard deviations necessary to have the 95 percent service probability assured? A. 1.28B. 1.64C. 1.96D. 2.00E. 2.18

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70. To take into consideration demand uncertainty in reorder point (R) calculations, what do we add to the product of the average daily demand and lead time in days when calculating the value of R? A. The product of average daily demand times a standard deviation of lead timeB. A "z" value times the lead time in daysC. The standard deviation of vendor lead time times the standard deviation of demandD. The product of lead time in days times the standard deviation of lead timeE. The product of the standard deviation of demand variability and a "z" score relating to a specific service probability

71. In order to determine the standard deviation of usage during lead time in the reorder point formula for a fixed-order quantity inventory model which of the following must be computed first? A. Standard deviation of daily demandB. Number of standard deviations for a specific service probabilityC. Stockout costD. Economic order quantityE. Safety stock level

72. If it takes a supplier four days to deliver an order once it has been placed and the standard deviation of daily demand is 10, which of the following is the standard deviation of usage during lead time? A. 10B. 20C. 40D. 100E. 400

73. If it takes a supplier 25 days to deliver an order once it has been placed and the standard deviation of daily demand is 20, which of the following is the standard deviation of usage during lead time? A. 50B. 100C. 400D. 1,000E. 1,600

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74. If it takes a supplier two days to deliver an order once it has been placed and the daily demand for three days has been 120, 124, and 125, which of the following is the standard deviation of usage during lead time? A. About 2.16B. About 3.05C. About 4.66D. About 5.34E. About 9.30

75. A company wants to determine its reorder point (R). Demand is variable and they want to build a safety stock into R. If the average daily demand is 12, the lead time is 5 days, the desired "z" value is 1.96, and the standard deviation of usage during lead time is 3, which of the following is the desired value of R? A. About 6B. About 16C. About 61D. About 66E. About 79

76. A company wants to determine its reorder point (R). Demand is variable and they want to build a safety stock into R. The company wants to have a service probability coverage of 95 percent. If average daily demand is 8, lead time is 3 days, and the standard deviation of usage during lead time is 2, which of the following is the desired value of R? A. About 17.9B. About 19.7C. About 24.0D. About 27.3E. About 31.2

77. Which of the following is not necessary to compute the order quantity using the fixed-time period model with safety stock? A. Forecast average daily demandB. Safety stockC. Inventory currently on handD. Ordering costE. Lead time in days

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78. Using the fixed-time period inventory model, and given an average daily demand of 200 units, 4 days between inventory reviews, 5 days for lead time, 120 units of inventory on hand, a "z" of 1.96, and a standard deviation of demand over the review and lead time of 3 units, which of the following is the order quantity? A. About 1,086B. About 1,686C. About 1,806D. About 2,206E. About 2,686

79. Using the fixed-time period inventory model, and given an average daily demand of 75 units, 10 days between inventory reviews, 2 days for lead time, 50 units of inventory on hand, a service probability of 95 percent, and a standard deviation of demand over the review and lead time of 8 units, which of the following is the order quantity? A. 863B. 948C. 1,044D. 1,178E. 4,510

80. Using the fixed-time period inventory model, and given an average daily demand of 15 units, 3 days between inventory reviews, 1 day for lead time, 30 units of inventory on hand, a service probability of 98 percent, and a standard deviation of daily demand is 3 units, which of the following is the order quantity? A. About 30.4B. About 42.3C. About 53.7D. About 56.8E. About 59.8

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81. You would like to use the fixed-time period inventory model to compute the desired order quantity for a company. You know that vendor lead time is 5 days and the number of days between reviews is 7. Which of the following is the standard deviation of demand over the review and lead time if the standard deviation of daily demand is 8? A. About 27.7B. About 32.8C. About 35.8D. About 39.9E. About 45.0

82. You would like to use the fixed-time period inventory model to compute the desired order quantity for a company. You know that vendor lead time is 10 days and the number of days between reviews is 15. Which of the following is the standard deviation of demand over the review and lead time period if the standard deviation of daily demand is 10? A. 25B. 40C. 50D. 73E. 100

83. If a vendor has correctly used marginal analysis to select their stock levels for the day (as in the newsperson problem), and the profit resulting from the last unit being sold (MP) is $0.90 and the loss resulting from that unit if it is not sold (ML) is $0.50, which of the following is the probability of the last unit being sold? A. Greater than 0.357B. Greater than 0.400C. Greater than 0.556D. Greater than 0.678E. None of the above

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84. If a vendor has correctly used marginal analysis to select their stock levels for the day (as in the newsperson problem), and the profit resulting from the last unit being sold (MP) is $120 and the loss resulting from that unit if it is not sold (ML) is $360, which of the following is the probability of the last unit being sold? A. Greater than 0.10B. Greater than 0.15C. Greater than 0.25D. Greater than 0.45E. None of the above

85. The Pareto principle is best applied to which of the following inventory systems? A. EOQB. Fixed-time periodC. ABC classificationD. Fixed-order quantityE. Single-period ordering system

86. Which of the following is the recommended percentage groupings of the ABC classifications of the dollar volume of products? A. A items get 15%, B items get 35%, and C items get 50%B. A items get 15%, B items get 45%, and C items get 40%C. A items get 25%, B items get 35%, and C items get 40%D. A items get 25%, B items get 15%, and C items get 60%E. A items get 20%, B items get 30%, and C items get 50%

87. Using the ABC classification system for inventory, which of the following is a true statement? A. The "C" items are of moderate dollar valueB. You should allocate about 15 % of the dollar volume to "B" itemsC. The "A" items are of low dollar valueD. The "A" items are of high dollar valueE. Inexpensive and low usage items are classified as "C" no matter how critical

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88. Which of the following values for "z" should we use in as safety stock calculation if we want a Service Probability of 98%? A. 1.64B. 1.96C. 2.05D. 2.30E. None of the above

89. Computer inventory systems are often programmed to produce a cycle count notice in which of the following case? A. When the record shows a near maximum balance on handB. When the record shows positive balance but a backorder was writtenC. When quality problems have been discovered with the itemD. When the item has become obsoleteE. When the item has been misplaced in the stockroom

Fill in the Blank Questions

90. What is the term for there being no relationship between demands for various items? ________________ ________________________________________

91. Assuming no safety stock, what is the re-order point (R) given an average daily demand of 100 units and a lead time of 5 days? ________________ ________________________________________

92. If annual demand is 8,000 units, the ordering cost is $20 per order and the holding cost is $12.50 per unit per year, what is the optimal order quantity using the fixed-order quantity inventory model? ________________ ________________________________________

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93. Using the fixed-time period inventory model, and given an average daily demand of 300 units, 4 days between inventory reviews, 5 days for lead time, 1,200 units of inventory on hand, a "z" of 1.96, and a standard deviation of demand over the review and lead time of 12 units, what quantity should be ordered? ________________ ________________________________________

94. Using the fixed-order quantity model, what is the total ordering cost of inventory given an annual demand of 36,000 units, a cost per order of $40 and a holding cost per unit per year of $45? ________________ ________________________________________

95. If it takes a supplier 10 days to deliver an order once it has been placed and the standard deviation of daily demand is 14, what is the standard deviation of usage during lead time? ________________ ________________________________________

96. What are the five purposes of inventory?1. ________________2. ________________3. ________________4. ________________5. ________________ ________________________________________

97. In making any decision that affects the size of inventory, what are the four categories of cost that must be considered?1. ________________2. ________________3. ________________4. ________________ ________________________________________

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98. What is the name of a physical inventory-taking technique that focuses only on certain items and counts more often than once or twice a year? ________________ ________________________________________

Essay Questions

99. Distinguish between dependent and independent demand. How are these demands treated differently?

100. What is "inventory accuracy," why is it important and how does inaccuracy occur?

101. Explain the difference between inventory control for finished goods in manufacturing and in services.

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Chapter 13 Inventory Control Answer Key

True / False Questions

1. Inventory is defined as the stock of any item or resource used in an organization. TRUE

AACSB: AnalyticDifficulty: EasyLearning Objective: 1Taxonomy: KnowledgeTopic: Purpose of Inventory

2. An inventory system is a set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be. TRUE


3. One of the basic purposes of inventory analysis in manufacturing and stockkeeping services is to specify when items should be ordered. TRUE


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4. One of the basic purposes of inventory analysis in manufacturing and stockkeeping services is to determine the level of quality to specify. FALSE


5. One of the basic purposes of inventory analysis in manufacturing and stockkeeping services is to determine how large the orders to vendors should be. TRUE


6. In inventory models, high holding costs tend to favor high inventory levels. FALSE

AACSB: AnalyticDifficulty: EasyLearning Objective: 4Taxonomy: UnderstandingTopic: Fixed-Order Quantity Models

7. In inventory models, high holding costs tend to favor low inventory levels and frequent replenishment. TRUE


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8. If the cost to change from one product to another were zero the lot size would be very small. TRUE


9. Shortage costs are precise and easy to measure. FALSE

AACSB: AnalyticDifficulty: EasyLearning Objective: 2Taxonomy: KnowledgeTopic: Independent versus Dependent Demand

10. Dependent demand inventory levels are usually managed by calculations using calculus-driven, cost-minimizing models. FALSE


11. The fixed-time period inventory system has a smaller average inventory than the fixed-order quantity system because it must also protect against stockouts during the review period when inventory is checked. FALSE

AACSB: AnalyticDifficulty: EasyLearning Objective: 5Taxonomy: KnowledgeTopic: Fixed-Order Quantity Models

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12. The fixed-order quantity inventory model favors less expensive items because average inventory is lower. FALSE


13. The fixed-order quantity inventory model is more appropriate for important items such as critical repair parts because there is closer monitoring and therefore quicker response to a potential stockout. TRUE


14. The fixed-order quantity inventory model requires more time to maintain because every addition or withdrawal is logged. TRUE


15. Fixed-order quantity inventory models are "event triggered." TRUE


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16. Fixed-order quantity inventory models are "time triggered." FALSE


17. Fixed-time period inventory models are "event triggered." FALSE


18. Fixed-time period inventory models are "time triggered." TRUE


19. Fixed-order quantity inventory systems determine the order point, R and the order quantity, Q values. TRUE


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20. The computation of a firm's inventory position is found by taking the inventory on hand and adding it to the on-order inventory, and then subtracting back-ordered inventory. TRUE

AACSB: AnalyticDifficulty: EasyLearning Objective: 6Taxonomy: KnowledgeTopic: Inventory Control and Supply Chain Management

21. Using the probability approach we assume that the demand for inventory over a period of time is normally distributed. TRUE


22. Safety stock can be defined as the amount of inventory carried in addition to the expected demand. TRUE


23. If demand for an item is normally distributed we plan for demand to be twice the average demand and carry 2 standard deviations worth of safety stock inventory. FALSE


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24. Safety stock can be computed when using the fixed-order quantity inventory model by multiplying a "z" value representing the number of standard deviations to achieve a service level or probability by the standard deviation of daily demand. FALSE

AACSB: AnalyticDifficulty: MediumLearning Objective: 5Taxonomy: KnowledgeTopic: Fixed-Order Quantity Models

25. Safety stock can be computed when using the fixed-order quantity inventory model by multiplying a "z" value representing the number of standard deviations to achieve a service level or probability by the standard deviation of lead time. TRUE


26. The key difference between a fixed-order quantity inventory model, where demand is known and one where demand is uncertain is in computing the reorder point. TRUE


27. Fixed-time period inventory models generate order quantities that vary from time period to time period, depending on the usage rate. TRUE


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28. Fixed-order quantity systems assume a random depletion of inventory, with less than an immediate order when a reorder point is reached. FALSE


29. The standard fixed-time period model assumes that inventory is never counted but determined by EOQ measures. FALSE


30. Safety stock is not necessary in any fixed-time period system. FALSE


31. In the fixed-time period model it is necessary to determine the inventory currently on hand to calculate the size of the order to place with a vendor. TRUE


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32. Some inventory situations involve placing orders to cover only one demand period or to cover short-lived items at frequent intervals. TRUE


33. The optimal stocking decision in inventory management, when using marginal analysis, occurs at the point where the benefits derived from carrying the next unit are more than the costs for that unit. FALSE


34. When stocked items are sold, the optimal inventory decision using marginal analysis is to stock that quantity where profit from the sale or use of the last unit is equal to or greater than the losses if the last unit remains unsold. TRUE


35. Cycle counting is a physical inventory-taking technique in which inventory is counted on a frequent basis rather than once or twice a year. TRUE


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36. The "sawtooth effect," named after turn-around artist Al "chainsaw" Dunlap, is the severe reduction of inventory and service levels that occurs when a firm has gone through a hostile takeover. FALSE


37. The "sawtooth effect," is named after the jagged shape of the graph of inventory levels over time. TRUE


38. Price-break models deal with the fact that the selling price of an item varies with the order size. TRUE


39. Price-break models deal with the fact that the selling price of an item generally increases as the order size increases. FALSE


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40. Price-break models deal with discrete or step changes in price as order size changes rather than a per-unit change. TRUE


41. In a price break model of lot sizing, to find the lowest-cost order quantity, it is necessary to calculate the economic order quantity for each possible price. TRUE


42. In a price break model of lot sizing, to find the lowest-cost order quantity, it is necessary to calculate the economic order quantity for each possible price and to check to see whether the lowest cost quantity is feasible. TRUE


43. In a price break model of lot sizing the lowest cost quantity is always feasible. FALSE


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Multiple Choice Questions

44. Which of the following is not one of the categories of manufacturing inventory? A. Raw materialsB. Finished productsC. Component partsD. Just-in-timeE. Supplies


45. Which of the following is one of the categories of manufacturing inventory? A. Economic Order InventoryB. Work-in-processC. Quality unitsD. JIT InventoryE. Re-order point


46. Firms keep supplies of inventory for which of the following reasons? A. To maintain dependence of operationsB. To provide a feeling of security for the workforceC. To meet variation in product demandD. To hedge against wage increasesE. In case the supplier changes the design


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47. Which of the following is not a reason to carry inventory? A. To provide a safeguard for variation in raw material delivery timeB. To take advantage of economic purchase-order sizeC. To maintain independence of operationsD. To meet variation in product demandE. To keep the stock out of the hands of competitors


48. When developing inventory cost models, which of the following is not included as costs to place an order? A. Phone callsB. TaxesC. ClericalD. Calculating quantity to orderE. Postage


49. When material is ordered from a vendor, which of the following is not a reason for delays in the order arriving on time? A. Normal variation in shipping timeB. A shortage of material at the vendor's plant causing backlogsC. An unexpected strike at the vendor's plantD. A lost orderE. Redundant ordering systems


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50. Which of the following is not included as an inventory holding cost? A. Annualized cost of materialsB. HandlingC. InsuranceD. PilferageE. Storage facilities


51. Which of the following is usually included as an inventory holding cost? A. Order placingB. BreakageC. Typing up an orderD. Quantity discountsE. Annualized cost of materials


52. In making any decision that affects inventory size, which of the following costs do not need to be considered? A. Holding costsB. Setup costsC. Ordering costsD. Fixed costsE. Shortage costs


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53. Which of the following are fixed-order quantity inventory models? A. Economic order quantity modelB. The ABC modelC. Periodic replenishment modelD. Cycle counting modelE. P model


54. Which of the following are fixed-time period inventory models? A. The EOQ modelB. The least cost methodC. The Q modelD. Periodic system modelE. Just-in-time model


55. Which of the following is a perpetual system for inventory management? A. Fixed-time periodB. Fixed-order quantityC. P modelD. First-in-first-outE. The wheel of inventory


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56. Which of the following is an assumption of the basic fixed-order quantity inventory model? A. Lead times are averagedB. Ordering costs are variableC. Price per unit of product is constantD. Back orders are allowedE. Stock-out costs are high


57. Which of the following is not an assumption of the basic fixed-order quantity inventory model? A. Ordering or setup costs are constantB. Inventory holding cost is based on average inventoryC. Diminishing returns to scale of holding inventoryD. Lead time is constantE. Demand for the product is uniform throughout the period


58. Which of the following is the symbol used in the textbook for the cost of placing an order in the fixed-order quantity inventory model? A. CB. TCC. HD. QE. S


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59. Which of the following is the set of all cost components that make up the fixed-order quantity total annual cost (TC) function? A. Annual purchasing cost, annual ordering cost, fixed costB. Annual holding cost, annual ordering cost, unit costC. Annual holding cost, annual ordering cost, annual purchasing costD. Annual lead time cost, annual holding cost, annual purchasing costE. Annual unit cost, annual set up cost, annual purchasing cost


60. Assuming no safety stock, what is the re-order point (R) given an average daily demand of 50 units, a lead time of 10 days and 625 units on hand? A. 550B. 500C. 715D. 450E. 475

AACSB: AnalyticDifficulty: MediumLearning Objective: 4Taxonomy: AnalysisTopic: Fixed-Order Quantity Models

61. Assuming no safety stock, what is the re-order point (R) given an average daily demand of 78 units and a lead time of 3 days? A. 421B. 234C. 78D. 26E. 312


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62. If annual demand is 12,000 units, the ordering cost is $6 per order and the holding cost is $2.50 per unit per year, which of the following is the optimal order quantity using the fixed-order quantity model? A. 576B. 240C. 120.4D. 60.56E. 56.03


63. If annual demand is 50,000 units, the ordering cost is $25 per order and the holding cost is $5 per unit per year, which of the following is the optimal order quantity using the fixed-order quantity model? A. 909B. 707C. 634D. 500E. 141


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64. If annual demand is 35,000 units, the ordering cost is $50 per order and the holding cost is $0.65 per unit per year, which of the following is the optimal order quantity using the fixed-order quantity model? A. 5,060B. 2,320C. 2,133D. 2,004E. 1,866


65. Using the fixed-order quantity model, which of the following is the total ordering cost of inventory given an annual demand of 36,000 units, a cost per order of $80 and a holding cost per unit per year of $4? A. $849B. $1,200C. $1,889D. $2,267E. $2,400

AACSB: AnalyticDifficulty: HardLearning Objective: 4Taxonomy: AnalysisTopic: Fixed-Order Quantity Models

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66. A company is planning for its financing needs and uses the basic fixed-order quantity inventory model. Which of the following is the total cost (TC) of the inventory given an annual demand of 10,000, setup cost of $32, a holding cost per unit per year of $4, an EOQ of 400 units, and a cost per unit of inventory of $150? A. $1,501,800B. $1,498,200C. $500,687D. $499,313E. None of the above


67. A company has recorded the last five days of daily demand on their only product. Those values are 120, 125, 124, 128, and 133. The time from when an order is placed to when it arrives at the company from its vendor is 5 days. Assuming the basic fixed-order quantity inventory model fits this situation and no safety stock is needed, which of the following is the reorder point (R)? A. 120B. 126C. 630D. 950E. 1,200


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68. A company has recorded the last six days of daily demand on a single product they sell. Those values are 37, 115, 93, 112, 73, and 110. The time from when an order is placed to when it arrives at the company from its vendor is 3 days. Assuming the basic fixed-order quantity inventory model fits this situation and no safety stock is needed, which of the following is the reorder point (R)? A. 540B. 270C. 115D. 90E. 60


69. Using the probability approach to determine an inventory safety stock and wanting to be 95 percent sure of covering inventory demand, which of the following is the number of standard deviations necessary to have the 95 percent service probability assured? A. 1.28B. 1.64C. 1.96D. 2.00E. 2.18


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70. To take into consideration demand uncertainty in reorder point (R) calculations, what do we add to the product of the average daily demand and lead time in days when calculating the value of R? A. The product of average daily demand times a standard deviation of lead timeB. A "z" value times the lead time in daysC. The standard deviation of vendor lead time times the standard deviation of demandD. The product of lead time in days times the standard deviation of lead timeE. The product of the standard deviation of demand variability and a "z" score relating to a specific service probability

AACSB: AnalyticDifficulty: MediumLearning Objective: 5Taxonomy: UnderstandingTopic: Fixed-Order Quantity Models

71. In order to determine the standard deviation of usage during lead time in the reorder point formula for a fixed-order quantity inventory model which of the following must be computed first? A. Standard deviation of daily demandB. Number of standard deviations for a specific service probabilityC. Stockout costD. Economic order quantityE. Safety stock level


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72. If it takes a supplier four days to deliver an order once it has been placed and the standard deviation of daily demand is 10, which of the following is the standard deviation of usage during lead time? A. 10B. 20C. 40D. 100E. 400


73. If it takes a supplier 25 days to deliver an order once it has been placed and the standard deviation of daily demand is 20, which of the following is the standard deviation of usage during lead time? A. 50B. 100C. 400D. 1,000E. 1,600


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74. If it takes a supplier two days to deliver an order once it has been placed and the daily demand for three days has been 120, 124, and 125, which of the following is the standard deviation of usage during lead time? A. About 2.16B. About 3.05C. About 4.66D. About 5.34E. About 9.30


75. A company wants to determine its reorder point (R). Demand is variable and they want to build a safety stock into R. If the average daily demand is 12, the lead time is 5 days, the desired "z" value is 1.96, and the standard deviation of usage during lead time is 3, which of the following is the desired value of R? A. About 6B. About 16C. About 61D. About 66E. About 79


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76. A company wants to determine its reorder point (R). Demand is variable and they want to build a safety stock into R. The company wants to have a service probability coverage of 95 percent. If average daily demand is 8, lead time is 3 days, and the standard deviation of usage during lead time is 2, which of the following is the desired value of R? A. About 17.9B. About 19.7C. About 24.0D. About 27.3E. About 31.2


77. Which of the following is not necessary to compute the order quantity using the fixed-time period model with safety stock? A. Forecast average daily demandB. Safety stockC. Inventory currently on handD. Ordering costE. Lead time in days


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78. Using the fixed-time period inventory model, and given an average daily demand of 200 units, 4 days between inventory reviews, 5 days for lead time, 120 units of inventory on hand, a "z" of 1.96, and a standard deviation of demand over the review and lead time of 3 units, which of the following is the order quantity? A. About 1,086B. About 1,686C. About 1,806D. About 2,206E. About 2,686


79. Using the fixed-time period inventory model, and given an average daily demand of 75 units, 10 days between inventory reviews, 2 days for lead time, 50 units of inventory on hand, a service probability of 95 percent, and a standard deviation of demand over the review and lead time of 8 units, which of the following is the order quantity? A. 863B. 948C. 1,044D. 1,178E. 4,510


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80. Using the fixed-time period inventory model, and given an average daily demand of 15 units, 3 days between inventory reviews, 1 day for lead time, 30 units of inventory on hand, a service probability of 98 percent, and a standard deviation of daily demand is 3 units, which of the following is the order quantity? A. About 30.4B. About 42.3C. About 53.7D. About 56.8E. About 59.8


81. You would like to use the fixed-time period inventory model to compute the desired order quantity for a company. You know that vendor lead time is 5 days and the number of days between reviews is 7. Which of the following is the standard deviation of demand over the review and lead time if the standard deviation of daily demand is 8? A. About 27.7B. About 32.8C. About 35.8D. About 39.9E. About 45.0


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82. You would like to use the fixed-time period inventory model to compute the desired order quantity for a company. You know that vendor lead time is 10 days and the number of days between reviews is 15. Which of the following is the standard deviation of demand over the review and lead time period if the standard deviation of daily demand is 10? A. 25B. 40C. 50D. 73E. 100


83. If a vendor has correctly used marginal analysis to select their stock levels for the day (as in the newsperson problem), and the profit resulting from the last unit being sold (MP) is $0.90 and the loss resulting from that unit if it is not sold (ML) is $0.50, which of the following is the probability of the last unit being sold? A. Greater than 0.357B. Greater than 0.400C. Greater than 0.556D. Greater than 0.678E. None of the above

AACSB: AnalyticDifficulty: MediumLearning Objective: 3Taxonomy: AnalysisTopic: Independent versus Dependent Demand

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84. If a vendor has correctly used marginal analysis to select their stock levels for the day (as in the newsperson problem), and the profit resulting from the last unit being sold (MP) is $120 and the loss resulting from that unit if it is not sold (ML) is $360, which of the following is the probability of the last unit being sold? A. Greater than 0.10B. Greater than 0.15C. Greater than 0.25D. Greater than 0.45E. None of the above

AACSB: AnalyticDifficulty: MediumLearning Objective: 3Taxonomy: AnalysisTopic: Independent versus Dependent Demand

85. The Pareto principle is best applied to which of the following inventory systems? A. EOQB. Fixed-time periodC. ABC classificationD. Fixed-order quantityE. Single-period ordering system


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86. Which of the following is the recommended percentage groupings of the ABC classifications of the dollar volume of products? A. A items get 15%, B items get 35%, and C items get 50%B. A items get 15%, B items get 45%, and C items get 40%C. A items get 25%, B items get 35%, and C items get 40%D. A items get 25%, B items get 15%, and C items get 60%E. A items get 20%, B items get 30%, and C items get 50%


87. Using the ABC classification system for inventory, which of the following is a true statement? A. The "C" items are of moderate dollar valueB. You should allocate about 15 % of the dollar volume to "B" itemsC. The "A" items are of low dollar valueD. The "A" items are of high dollar valueE. Inexpensive and low usage items are classified as "C" no matter how critical


88. Which of the following values for "z" should we use in as safety stock calculation if we want a Service Probability of 98%? A. 1.64B. 1.96C. 2.05D. 2.30E. None of the above


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89. Computer inventory systems are often programmed to produce a cycle count notice in which of the following case? A. When the record shows a near maximum balance on handB. When the record shows positive balance but a backorder was writtenC. When quality problems have been discovered with the itemD. When the item has become obsoleteE. When the item has been misplaced in the stockroom


Fill in the Blank Questions

90. What is the term for there being no relationship between demands for various items? ________________ Independent demand


91. Assuming no safety stock, what is the re-order point (R) given an average daily demand of 100 units and a lead time of 5 days? ________________ 500

AACSB: AnalyticDifficulty: EasyLearning Objective: 2Taxonomy: AnalysisTopic: Independent versus Dependent Demand

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92. If annual demand is 8,000 units, the ordering cost is $20 per order and the holding cost is $12.50 per unit per year, what is the optimal order quantity using the fixed-order quantity inventory model? ________________ 160


93. Using the fixed-time period inventory model, and given an average daily demand of 300 units, 4 days between inventory reviews, 5 days for lead time, 1,200 units of inventory on hand, a "z" of 1.96, and a standard deviation of demand over the review and lead time of 12 units, what quantity should be ordered? ________________ 1,571


94. Using the fixed-order quantity model, what is the total ordering cost of inventory given an annual demand of 36,000 units, a cost per order of $40 and a holding cost per unit per year of $45? ________________ $5,692


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95. If it takes a supplier 10 days to deliver an order once it has been placed and the standard deviation of daily demand is 14, what is the standard deviation of usage during lead time? ________________ 44.27


96. What are the five purposes of inventory?1. ________________2. ________________3. ________________4. ________________5. ________________ (1.) To maintain independence of operations; (2.) To meet variation in product demand; (3.) To allow flexibility in production scheduling; (4.) To provide a safeguard for variation in raw material delivery time; (5.) To take advantage of economic purchase order size

AACSB: AnalyticDifficulty: MediumLearning Objective: 1Taxonomy: KnowledgeTopic: Purpose of Inventory

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97. In making any decision that affects the size of inventory, what are the four categories of cost that must be considered?1. ________________2. ________________3. ________________4. ________________ (1.) Holding (or carrying) cost; (2.) Setup (or production change) cost; (3.) Ordering costs; (4.) Shortage cost

AACSB: AnalyticDifficulty: MediumLearning Objective: 6Taxonomy: KnowledgeTopic: Inventory Control and Supply Chain Management

98. What is the name of a physical inventory-taking technique that focuses only on certain items and counts more often than once or twice a year? ________________ Cycle counting


Essay Questions

99. Distinguish between dependent and independent demand. How are these demands treated differently?

The text distinguishes between dependent and independent demands on pages 391-92. Dependent demand means that the need for an item is directly related to the need for some other item. Independent demand is uncertain and is not related to the need for any other item. Typically, independent demand is the demand for an end item offered in the marketplace.

AACSB: AnalyticDifficulty: MediumLearning Objective: 2Taxonomy: KnowledgeTopic: Independent versus Dependent Demand

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100. What is "inventory accuracy," why is it important and how does inaccuracy occur?

Inventory accuracy is discussed on pages 412-14 of the text. It has to do with discrepancies between the amount of an item on hand and the amount that the inventory records indicate are on hand. There are two ways to measure inventory accuracy: one is by the percentage of the total number of items where records do not match physical reality. The other way of measuring inventory accuracy is the percentage difference between recorded and on-hand inventory. Inventory accuracy is important because inventory records interact with planning activities like MRP or ERP. When the physical amount on hand is less than the recorded amount interruptions in production are likely. If there is more on hand than is recorded it is likely that orders will be generated, obsolescence can be more likely and cost data will be inaccurate. There are two main causes of inventory inaccuracy: improper record-keeping and unauthorized usage. Physical restraints (e.g., a locked supply room), disciplined record-keeping and frequent physical inventory-taking (for example, as in cycle-counting) are the main weapons against inventory inaccuracy.

AACSB: AnalyticDifficulty: HardLearning Objective: 6Taxonomy: KnowledgeTopic: Inventory Control and Supply Chain Management

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101. Explain the difference between inventory control for finished goods in manufacturing and in services.

This question requires the student to integrate some themes that have been sounded throughout the text. The topic of this chapter is inventory control and almost exclusively deals with manufactured goods. By convention, manufacturing inventory generally refers to items that contribute to or become part of a firm's product output. Manufacturing inventory is typically classified into raw materials, finished products, component parts, supplies, and work-in-process. In services, inventory generally refers to the tangible goods to be sold and the supplies necessary to administer the service. Since finished services are highly perishable and hard to inventory companies usually hold them in the form of capacity to create the service to meet peak demand. Thus, services that are not capital intensive often have very substantial capital equipment capacity cushions (See Chapter 3, Strategic Capacity Management, page 49, and also Chapter 5, Service Processes) when measuring average demand against capacity. Where capacity is very costly (e.g., the industry is capital intensive) attempts are made to manage demand through yield management (see Chapter 12, page 372.) A successful response to this question will note the underlying differences between manufacturing and services and comment to the effect that inventory of finished goods is possible in most manufacturing operations but, in most services, the operating system either has the flexibility to operate at a variety of levels with little penalty or else demand is able to be managed through appropriate pricing strategies.

AACSB: AnalyticDifficulty: HardLearning Objective: 1Learning Objective: 2Taxonomy: SynthesisTopic: Purpose of Inventory, Independent versus Dependent Demand

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Chap 013

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Transcript of Chap 013