38
16) The purpose of work-in-process inventory is to ensure that machine failures and work stoppages in
one operation do not affect other operations.
Keywords: Work-In-Process Inventory
Learning Obj.: L.O. 17.3
AACSB: Reflective Thinking
17) The purpose of carrying inventory is to
A) make different production processes more dependent on sales.
B) make sales more independent of the production process.
C) have collateral for loans.
D) improve the current ratio.
Keywords: Carrying Cost, Inventory
Learning Obj.: L.O. 17.3
AACSB: Reflective Thinking
18) Of the following EOQ model assumptions, the most limiting is
A) uniform demand.
B) constant unit price.
C) constant ordering costs.
D) independent orders.
Keywords: EOQ Model, Uniform Demand
Learning Obj.: L.O. 17.3
AACSB: Reflective Thinking
19) In the basic EOQ model, the optimal inventory level is the point at which
A) total cost is minimized.
B) total revenue is maximized.
C) carrying costs are minimized.
D) ordering costs are minimized.
Keywords: EOQ Model, Carrying Costs, Ordering Costs
Learning Obj.: L.O. 17.3
AACSB: Reflective Thinking
39
20) If the variables in the EOQ inventory model are defined as: S = total units demanded during the
planning period, O = ordering costs per order, C = carrying costs per unit and Q = inventory order size in
units, then the average level of inventory which a company should have during the planning period is
A) 2/3 Q.
B) 1/2 Q.
C) SO/C.
D) 1/2 S.
Keywords: EOQ Model
Learning Obj.: L.O. 17.3
AACSB: Analytical Thinking
21) Brett’s Gift Box estimates that it will sell 30,000 porcelain figurines next year. Because porcelain
figurines are so easily damaged, the average per unit carrying cost of the figurines is $25. The per order
cost of ordering is $800. Assume that Brett wants a safety stock of 75 figurines. If Brett reorders the
figurines based on the economic order quantity, what is Brett’s average inventory of porcelain figurines?
A) 768
B) 854
C) 628
D) 700
Keywords: EOQ Model, Average Inventory, Safety Stock
Learning Obj.: L.O. 17.3
AACSB: Analytical Thinking
22) Krause Precision Tools, Inc. will use an estimated 700,000 small processors in its manufacturing
process next year. The carrying cost of processor inventory is $3.00 per unit and the cost of reordering
processors is $100 per order. What is Krause’s economic ordering quantity for small processors?
A) 6,340
B) 6,831
C) 7,118
D) 7,300
Keywords: EOQ Model
Learning Obj.: L.O. 17.3
AACSB: Analytical Thinking
40
23) Newtown Manufacturing, Inc. uses semi-hex joints in its manufacturing process. If Newtown’s total
demand for the joints for next year is estimated to be 57,000 units, and if the cost per order is $225, what is
Newtown‘s economic order quantity of semi–hex joints? Assume that carrying costs for semi-hex joints
are $0.75 per unit.
A) 3,729
B) 3,987
C) 4,944
D) 5,848
Keywords: EOQ Model
Learning Obj.: L.O. 17.3
AACSB: Analytical Thinking
24) The Road Ready Riding, Inc. will use an estimated 24,000 wheel assemblies in its manufacturing
process next year. The carrying cost of the wheel assembly inventory is $1.80 per wheel and the ordering
cost per order is $50. What is Road Ready‘s economic ordering quantity of wheel assemblies?
A) 785
B) 997
C) 1,098
D) 1,155
Keywords: EOQ Model
Learning Obj.: L.O. 17.3
AACSB: Analytical Thinking
25) How do interest rates affect the optimal order quantity Q*?
A) As interest rates increase, Q* decreases.
B) As interest rates decrease, Q* decreases.
C) As interest rates increase, Q* increases until it reaches a maximum, after which any further increase in
interest causes a decline in Q*.
D) None of the above
Keywords: Optimal Order Quantity, Interest Rates
Learning Obj.: L.O. 17.3
AACSB: Analytical Thinking
26) Which of the following is NOT a category of inventory?
A) raw materials
B) work-in-process
C) purchases
D) finished goods
Keywords: Inventory, Raw Materials, Work-In-Process, Finished Goods
Learning Obj.: L.O. 17.3
AACSB: Reflective Thinking
41
27) In the EOQ model, carrying costs of inventory include
A) the required rate of return on inventory.
B) wages for warehouse workers.
C) costs associated with inventory shrinkage.
D) B and C.
E) all of the above.
Keywords: EOQ Model, Carrying Costs
Learning Obj.: L.O. 17.3
AACSB: Reflective Thinking
28) Inflation affects the EOQ model in all of the following ways EXCEPT
A) changing the investment in accounts receivable.
B) encourages anticipatory buying.
C) increased carrying costs.
D) encourages buying early to avoid price increases.
Keywords: EOQ Model, Inflation, Anticipatory Buying, Carrying Costs
Learning Obj.: L.O. 17.3
AACSB: Analytical Thinking
29) Which of the following is NOT an underlying assumption of the EOQ?
A) uniform demand
B) constant unit price
C) variable carrying cost
D) instantaneous delivery
Keywords: EOQ Model
Learning Obj.: L.O. 17.3
AACSB: Reflective Thinking
30) Mountain Snow Sports, Inc. is trying to determine the optimal order quantity for snow boards for the
next twelve months. Annual sales are expected to be 1,000,000 units at a retail price of $400 each. The cost
of carrying snow boards is $80 per year. Studies show that it costs Mountain Snow $250 to prepare and
receive an order. What is the EOQ?
A) 2,750
B) 2,500
C) 2,000
D) 1,850
Keywords: EOQ Model
Learning Obj.: L.O. 17.3
AACSB: Analytical Thinking
42
31) Fiesta Taco Company purchases 30,000 boxes of ground beef each year. It costs $50 to place each order
and $10.00 per year for each box held as inventory.
a. What is the average inventory held during the year?
b. What is the economic order quantity for the ground beef?
c. How many orders will be made each year?
Keywords: EOQ Model
Learning Obj.: L.O. 17.3
AACSB: Analytical Thinking
32) Manfred Manufacturing is involved in the production of machine parts. The company uses 600,000
pounds of steel annually. The current purchasing cost for steel is $3.20 per pound. The carrying cost for
inventory is 10 percent of the purchase price. The cost of ordering steel is $800 per order. The company
has decided to maintain a safety stock of 15,000 pounds. The delivery time per order is 6 days. The
company works 365 days a year.
a. Determine the optimal EOQ.
b. How many orders will be placed annually?
c. What is the average inventory?
d. What is the inventory order point? (That is, at what level of inventory should a new order be placed?)
e. What is the company‘s total inventory cost for the year?
Keywords: EOQ Model
Learning Obj.: L.O. 17.3
AACSB: Analytical Thinking
43
33) A flower shop is trying to determine the optimal order quantity of the wicker baskets that it places
many of its arrangements in. The store thinks it will sell 2000 of these baskets over the next year. The
baskets cost the shop $2.00 each. The carrying cost of the baskets is $0.15 each per year. It costs the shop
$8.00 to order.
a. What is the economic order quantity?
b. What is the total cost for ordering the baskets once a year? Four times a year?
Keywords: EOQ Model
Learning Obj.: L.O. 17.3
AACSB: Analytical Thinking
34) A local lamp store expects to sell 2000 lamps in the coming year. It costs the store $1.00 in carrying
costs for each lamp and $10.00 for each order placed.
a. What is the economic order quantity for the lamps?
b. How many orders will be placed each year?
c. If the store wants a one-week safety stock and it takes one week to receive an order after it has been
placed, what should the inventory level be when a new order is placed? Assume a 50-week year.
Keywords: EOQ Model, Safety Stock
Learning Obj.: L.O. 17.3
AACSB: Analytical Thinking
44
35) A textile manufacturer has cloth that has a $14 per yard carrying cost per year. This cloth is used at a
rate of 25,000 yards per year, and ordering costs are $10 per order.
a. What is the economic order quantity for this cloth?
b. What are the annual inventory costs for this firm if it orders in this quantity?
Keywords: EOQ Model
Learning Obj.: L.O. 17.3
AACSB: Analytical Thinking
36) The economic order quantity (EOQ) model is well accepted. However, there are weaknesses
associated with several of its assumptions. What are these weaknesses?
Keywords: EOQ Model
Learning Obj.: L.O. 17.3
AACSB: Reflective Thinking
37) What assumptions underlie the EOQ formula?
Keywords: EOQ Model
Learning Obj.: L.O. 17.3
AACSB: Reflective Thinking