Chapter 11 Inventory Management

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Which of the following is not one of the categories of manufacturing inventory?

A. Raw materials B. Finished products C. Component parts D. *** Just-in-time E. Supplies Manufacturing inventory is typically classified into raw materials, finished products, component parts, supplies, and work-in-process.

Which of the following is one of the categories of manufacturing inventory?

A. Economic Order Inventory ***B. Work-in-process C. Quality units D. JIT Inventory E. Re-order point Manufacturing inventory is typically classified into raw materials, finished products, component parts, supplies, and work-in-process.

Firms keep supplies of inventory for which of the following reasons?

A. To maintain dependence of operations B. To provide a feeling of security for the workforce ***C. To meet variation in product demand D. To hedge against wage increases E. In case the supplier changes the design All firms keep a supply of inventory for the following reasons: 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.

Which of the following is not a reason to carry inventory?

A. To provide a safeguard for variation in raw material delivery time B. To take advantage of economic purchase-order size C. To maintain independence of operations D. To meet variation in product demand **E. To keep the stock out of the hands of competitors

When developing inventory cost models, which of the following are not included as costs to place an order?

A. Phone calls **B. Taxes C. Clerical D. Calculating quantity to order E. Postage There are costs to place an order: labor, phone calls, typing, postage, and so on. Therefore, the larger each order is, the fewer the orders that need to be written. Also, shipping costs favor larger orders—the larger the shipment, the lower the per-unit cost. Ordering costs refer to the managerial and clerical costs to prepare the purchase or production order. Ordering costs include all the details, such as counting items and calculating order quantities. The costs associated with maintaining the system needed to track orders are also included in ordering costs.

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 time B. A shortage of material at the vendor’s plant causing backlogs C. An unexpected strike at the vendor’s plant D. A lost order **E. Redundant ordering systems When material is ordered from a vendor, delays can occur for a variety of reasons: a normal variation in shipping time, a shortage of material at the vendor’s plant causing backlogs, an unexpected strike at the vendor’s plant or at one of the shipping companies, a lost order, or a shipment of incorrect or defective material.

Which of the following is not included as an inventory holding cost?

***A. Annualized cost of materials B. Handling C. Insurance D. Pilferage E. Storage facilities Holding costs include the costs for storage facilities, handling, insurance, pilferage, breakage, obsolescence, depreciation, taxes, and the opportunity cost of capital.

Which of the following is usually included as an inventory holding cost?

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A. Order placing **B. Breakage C. Typing up an order D. Quantity discounts E. Annualized cost of materials Holding costs include the costs for storage facilities, handling, insurance, pilferage, breakage, obsolescence, depreciation, taxes, and the opportunity cost of capital

In making any decision that affects inventory size, which of the following costs do not need to be considered?

A. Holding costs B. Setup costs C. Ordering costs ***D. Fixed costs E. Shortage costs In making any decision that affects inventory size, the following costs must be considered. 1. Holding (or carrying) costs. 2. Setup (or production change) costs. 3. Ordering costs. 4. Shortage costs.

Which of the following are fixed-order quantity inventory models?

***A. Economic order quantity model B. The ABC model C. Periodic replenishment model D. Cycle counting model E. P model There are two general types of multi-period inventory systems: fixed-order quantity models (also called the economic order quantity, EOQ, and Q-model) and fixed-time period models (also referred to variously as the periodic system, periodic review system, fixed order interval system, and P-model).

Which of the following are fixed-time period inventory models?

A. The EOQ model B. The least cost method C. The Q model **D. Periodic system model E. Just-in-time model There are two general types of multi-period inventory systems: fixed-order quantity models (also called the economic order quantity, EOQ, and Q-model) and fixed-time period models (also referred to variously as the periodic system, periodic review system, fixed order interval system, and P-model).

Which of the following is a perpetual system for inventory management?

A. Fixed-time period **B. Fixed-order quantity C. P model D. First-in-first-out E. The wheel of inventory The fixed-order quantity model is a perpetual system, which requires that every time a withdrawal from inventory or an addition to inventory is made, records must be updated to reflect whether the reorder point has been reached.

Which of the following is an assumption of the basic fixed-order quantity inventory model?

A. Lead times are averaged B. Ordering costs are variable **C. Price per unit of product is constant D. Back orders are allowed E. Stock-out costs are high These assumptions are unrealistic, but they represent a starting point and allow us to use a simple example: 1. Demand for the product is constant and uniform throughout the period. 2. Lead time (time from ordering to receipt) is constant. 3. Price per unit of product is constant. 4. Inventory holding cost is based on average inventory. 5. Ordering or setup costs are constant. 6. All demands for the product will be satisfied. (No backorders are allowed.)

Which of the following is not an assumption of the basic fixed-order quantity inventory model?

A. Ordering or setup costs are constant B. Inventory holding cost is based on average inventory **C. Diminishing returns to scale of holding inventory D. Lead time is constant E. Demand for the product is uniform throughout the period

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. C B. TC C. H D. Q **E. S S = Setup cost or cost of placing an order

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 cost B. Annual holding cost, annual ordering cost, unit cost **C. Annual holding cost, annual ordering cost, annual purchasing cost D. Annual lead time cost, annual holding cost, annual purchasing cost E. Annual unit cost, annual set up cost, annual purchasing cost Total Annual Cost = Annual Purchase Cost + Annual Ordering Cost + Annual Holding Cost. See equation 11.2.

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. 550 **B. 500 C. 715 D. 450 E. 475 See equation 11.4. Fifty (50) times ten (10) equals 500

Assuming no safety stock, what is the reorder point (R) given an average daily demand of 78 units and a lead time of 3 days?

A. 421 **B. 234 C. 78 D. 26 E. 312 See equation 11.4. 78 times 3 = 234

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. 576 **B. 240 C. 120.4 D. 60.56 E. 56.03 From equation 11.3, Q = 240 = Square root of (2 x 12,000 x 6/2.5)

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. 909 **B. 707 C. 634 D. 500 E. 141 From equation 11.3, Q = 707.1 = Square root of (2 x 50,000 x 25/5)

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. 5,060 **B. 2,320 C. 2,133 D. 2,004 E. 1,866 From equation 11.3, Q = 2,320.5 = Square root of (2 x 35,000 x 50/0.65)

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. $849 B. $1,200 C. $1,889 D. $2,267 **E. $2,400 From equation 11.3, Q = 1,200 = Square root of (2 x 36,000 x 80/4). Number of orders per year = 36,000/1,200 = 30 x $80 = $2,400

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. $1,501,600 B. $1,498,200 C. $500,687 D. $499,313 E. None of the above Use equation 11.2. Q = 400. Average Inventory = Q/2 = 200. Holding cost/year = $4. Thus, annual holding cost = $800. Annual set-up cost = 10,000/400 = 25 x $32 = 800. Demand x cost per unit = 10,000 x $150 = 1,500,000. Hence, TC = $1,500,000 + 800 + 800 = $1,501,600.

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. 120 B. 126 **C. 630 D. 950 E. 1,200 Using equation 11.4, Average demand is 120 + 125 + 124 + 128 + 133/5 = 126. Lead time = 5 days so the reorder point is 126 x 5 = 630.

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. 540 **B. 270 C. 115 D. 90 E. 60 Using equation 11.4, Average demand is 37 + 115 + 93 + 112 + 73 + 110/6 = 90. Lead time = 3 days so the reorder point is 90 x 3 = 270.

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. 1.28 **B. 1.64 C. 1.96 D. 2.00 E. 2.18 Companies using this approach generally set the probability of not stocking out at 95 percent. This means we would carry about 1.64 standard deviations of safety stock,

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 demand B. Number of standard deviations for a specific service probability C. Stockout cost D. Economic order quantity E. Safety stock level

The Pareto principle is best applied to which of the following inventory systems?

A. EOQ B. Fixed-time period **C. ABC classification D. Fixed-order quantity E. Single-period ordering system

ABC Inventory classification

Divides inventory into dollar volume categories that map into strategies appropriate for the category

Cycle counting

A physical inventory-taking technique in which inventory is counted on a frequent basis rather than one or twice a year

Dependent demand

The need for any one item is a direct result of the need for some other item, usually an item of which it is a part

Fixed-order quantity model Q-model

An inventory control model where the amount requisitioned is fixed and the actual ordering is triggered by inventory dropping to a specified level of inventory.

Fixed-time period model P-model

An inventory control model that specifies inventory is ordered at the end of a predetermined time period. The interval of time between orders is fixed and the order quantity varies.

Independent demand

The demand for various items are unrelated to each other

Inventory position

The amount on hand plus on order minus backordered quantities. In the case where inventory has been allocated for special purposes, the inventory position is reduced by these allocated amounts.

Inventory

The stock of any item or resource used in an organization

Safety stock

The amount of inventory carried in addition to the expected demand.

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