Chapter 14 – Independent Demand Inventory
True/False Questions
52. Transit inventories are also referred to as pipeline inventories because they consist of
materials that are on their way from one point to another point in the supply chain.
53. Dependent demand items are subject to market forces and often have predictable demand
patterns.
54. The average inventory level is defined as the difference between the cycle stock and the
safety stock.
55. In general, it is extremely difficult to estimate stockout costs and hence we use the desired
service levels while computing the reorder points.
Chapter 14 – Independent Demand Inventory
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Essay Questions
62. Lincoln Machine Tool Company maintains an inventory pool consisting of 10 items. Each
of these items has a unique demand pattern and may require a different kind of inventory
management system. The annual demand pattern and the unit cost of these items are given in
the following table. Conduct an ABC inventory analysis and classify these items into A, B,
and C type of inventories. Suggest suitable methods for managing these three distinct types of
inventories:
Item
Unit Cost
Annual Usage (in units)
1
$1.50
5,000
2
$8.00
1,500
3
$10.50
10,000
4
$2.00
6,000
5
$0.50
7,500
6
$13.60
6,000
7
$0.75
5,000
8
$1.25
4,500
9
$2.50
7,000
10
$2.00
3,000
LO: 14.8
Topic: ABC Classification of Inventory
Difficulty: 2 Moderate
AACSB: Application of knowledge
Bloom’s: Understand, apply
Feedback: See below.
Chapter 14 – Independent Demand Inventory
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The ABC classification is done by determining the annual dollar usage and the percentage of
total dollar usage as shown in the following table:
Item
Unit
Cost
Annual Usage (in units)
Dollar Usage
Percentage of Total Dollar
Usage
1
$1.50
5,000
$7500
2.9%
2
$8.00
1,500
$12,000
4.7%
3
$10.50
10,000
$105,000
41.2%
4
$2.00
6,000
$12,000
4.7%
5
$0.50
7,500
$3750
1.5%
6
$13.60
6,000
$81,600
32.0%
7
$0.75
5,000
$3750
1.5%
8
$1.25
4,500
$5625
2.2%
9
$2.50
7,000
$17,500
6.9%
10
$2.00
3,000
$6000
2.4%
5,000
$254,715
100%
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