35) In the pricing schedule for marginal unit quantity discounts,
A) the average cost of a unit decreases at a breakpoint.
B) the average cost of a unit increases at a breakpoint.
C) the marginal cost of a unit decreases at a breakpoint.
D) the marginal cost of a unit increases at a breakpoint.
36) Quantity discounts lead to
A) a significant buildup of cycle inventory in the supply chain.
B) a slight buildup of cycle inventory in the supply chain.
C) a decrease in cycle inventory in the supply chain.
D) minor fluctuations of cycle inventory in the supply chain.
37) Trade promotions lead to a significant ________ in lot size and cycle inventory because of
forward buying by the ________.
A) decrease; retailer
B) increase; retailer
C) decrease; supplier
D) increase; supplier
Scenario 11.4 — The Gutter
A rodent infestation has left a landlord with a major cleanup job; in fact, the cleanup will consist
of ripping out all the walls and ceilings of an 1860 square foot house to replace them. A trip to
the local home improvement store reveals that 4’x8′ sheets of drywall have three price points as
indicated in the table. Another consideration for the landlord is that he is equipped with only a
humble half-ton pickup truck, that can hold at most 20 sheets. His truck sips fuel, so he considers
only wear and tear on his vehicle at $5 to haul all the sheets he will use for the job. The holding
percentage is 20%. The landlord believes the entire job — all walls and ceiling — will require
10,080 square feet of drywall.
Purchase Quantity
Price Per Sheet
1-20
$9.40
21-100
$9.30
101 or more
$9.20
38) Use the information in Scenario 11.4 to determine the number of sheets of drywall required.
A) 315
B) 150
C) 58.125
D) 5.41
39) Use the information in Scenario 11.4 to determine the best number of sheets to purchase at a
time. (Assume he can buy only an integer-multiple of sheets.)
A) 101
B) 41
C) 21
D) 20
40) Use the information in Scenario 11.4 to determine the total cost (including the cost of the
drywall) resulting from purchasing the optimal number of sheets per order. Assume he can buy
only an integer-multiple of sheets.
A) $3,006.98
B) $3,006.51
C) $3,006.04
D) $3,005.67
41) Use the information in Scenario 11.4 to determine the total holding cost resulting from
purchasing the optimal number of sheets per order. Assume he can buy only an integer-multiple
of sheets.
A) $64.23
B) $92.92
C) $15.59
D) $38.27
42) Consider the $9.40 per sheet figure as the base price and use the information in Scenario 11.4
to answer the following question. What percentage discount from the base price results in an
optimal order quantity of 101 sheets?
A) 2.16%
B) 2.03%
C) 1.86%
D) 1.42%
43) Use the information in Scenario 11.4 to determine the average inventory level resulting from
purchasing the optimal number of sheets per order. Assume he can buy only an integer-multiple
of sheets.
A) 7.65
B) 20.58
C) 38.27
D) 50.5
44) After a recent tornado, the home improvement store eliminates the quantity discount benefit
and raises the price per sheet of drywall to $15. Use the information in Scenario 11.4 to
determine the best number of sheets to purchase.
A) 101
B) 61
C) 32
D) 20
45) If decisions made at the retailer and supplier stage serve to maximize total supply chain
profits, the supply chain is
A) coordinated.
B) discriminatory.
C) level.
D) best in practice.
46) ________ is the practice whereby a firm charges differential prices to maximize profits.
A) Optimal lot sizing
B) Fixed pricing
C) Nonperishable pricing
D) Price discrimination
47) In a supply chain where each stage of the supply chain independently makes its pricing
decisions with the objective of maximizing its own profit,
A) supply chain profit is lower than a coordinated solution.
B) supply chain profit is higher than a coordinated solution.
C) supply chain profit is about the same as a coordinated solution.
D) supply chain profit will be maximized.
48) In a supply chain for commodity products, in order to maximize supply chain surplus, the
objective of supply chain members should be to
A) supplement the product with a service.
B) maximize revenue.
C) minimize costs.
D) de-commoditize the product.
49) For products where the firm has market power, coordination in the supply chain can be
achieved and supply chain profits maximized through the use of
A) two-part tariffs or volume based quantity discounts.
B) marginal unit quantity discounts.
C) all unit quantity discounts.
D) basic quantity discounts.
50) The practice where a firm charges differential prices to maximize profits is
A) lot pricing.
B) marginal pricing.
C) price incrimination.
D) price discrimination.
51) Discounts related to price discrimination will be
A) volume based.
B) unit based.
C) marginally based.
D) lot size based.
52) The goal of trade promotions is to
A) influence retailers to act in a way that helps the retailer achieve its objectives.
B) influence retailers to act in a way that helps the manufacturer achieve its objectives.
C) influence retailers to act in a way that will maximize supply chain profit.
D) influence retailers to act in a way minimize supply chain cost.
53) The retailer can justify the forward buying when
A) they have inadvertently built up a lot of excess inventory.
B) the forward buy allows the manufacturer to smooth demand by shifting it from peak to low-
demand periods.
C) it decreases his total cost.
D) A and C only
54) Replenishment orders in multi-echelon supply chains should be
A) synchronized to increase cycle inventory and order costs.
B) synchronized to facilitate supplier evaluation and selection.
C) synchronized to keep cycle inventory and order costs low.
D) separated to increase cycle inventory and order costs.
Scenario 11.4 — Caffeine and Sugar
With a fixed cost of $100 per order, Nathan decided it was vital to get his money’s worth. His
monthly demand for energy drinks was 10,000 bottles and holding cost was estimated at 20% of
unit cost. The mail order company offered him a couple of possibilities – he could pay $4.00 per
bottle for orders of up to 10,000 bottles. After that threshold, he would pay only $3.98 per bottle,
and if he ordered 20,00 or more bottles in an order, he would pay only $3.96 per bottle.
55) What is the best order quantity for Nathan to use?
A) 5,477
B) 5,505
C) 10,000
D) 5,491
56) What is the best total cost that Nathan can incur?
A) $488,644
B) $492,780
C) $493,720
D) $484,382
57) Which cost takes into account the return demanded on the firm’s equity and the amount the
firm must pay on its debt?
A) Cost of capital
B) Obsolescence (spoilage) cost
C) Handling cost
D) Occupancy cost
58) Which cost should only include receiving and storage costs that vary with the quantity of
product received?
A) Cost of capital
B) Obsolescence (spoilage) cost
C) Handling cost
D) Occupancy cost
59) Which cost should reflect the incremental change in space cost due to changing cycle
inventory?
A) Cost of capital
B) Obsolescence (spoilage) cost
C) Handling cost
D) Occupancy cost
60) Which of these is typically NOT considered a driver of lot sizing decisions in the supply
chain?
A) Fixed costs associated with production or purchasing
B) Quantity discounts offered by suppliers
C) Short-term price discounts offered by suppliers
D) Order batching at any step further upstream than retail
61) Which of these managerial levers should be used to reduce large lots associated with the
fixed cost of production?
A) Reducing changeover times
B) Facilitating the aggregation of shipments
C) Deployment of suitable technology
D) Reducing supplier fixed costs
62) Which of these managerial levers should be used to reduce large lots associated with the
fixed cost of transportation?
A) Reducing changeover times
B) Facilitating the aggregation of shipments
C) Deployment of suitable technology
D) Reducing supplier fixed costs
63) Which of these managerial levers should be used to reduce large lots associated with the
fixed cost of order placement and receipt?
A) Reducing changeover times
B) Facilitating the aggregation of shipments
C) Deployment of suitable technology
D) Reducing supplier fixed costs
64) Which of these managerial levers should be used to reduce large lots associated with the
fixed cost of lot-sized based discounts?
A) Reducing changeover times
B) Facilitating the aggregation of shipments
C) Deployment of suitable technology
D) Reducing supplier fixed costs
65) The appropriate managerial lever to use to reduce large lots associated with lot size-based
discounts is to
A) have suppliers transition to offering volume discounts based on a rolling horizon.
B) eliminate short term discounts and move to EDLP.
C) link the quantity sold at a discount price to sell-through rather than sell-in.
D) limit the quantity that buyers can purchase at the discount price.
11.3 Essay Questions
1) Discuss the role of cycle inventory in the supply chain.
2) The XYZ Company has an assembly plant in Cincinnati and its parts plant in Indianapolis.
Parts are transported from Indianapolis to Cincinnati using trucks. Each shipment costs $100.
The Cincinnati plant assembles and sells 300 finished products each day and operates 5 days a
week and 50 weeks a year. Part #456 costs $50 and XYZ Company incurs a holding cost of 20
percent per year. How many of part #456 should XYZ Company put in each shipment? What is
the cycle inventory of part #456 at XYZ Company?
3) Tastee Mart sells Frostee Flakes. Demand for Frostee Flakes is 500 boxes per week. Tastee
Mart has a holding cost of 30 percent and incurs a fixed cost of $100 for each replenishment
order it places for Frostee Flakes. Given that cost is $2 per box of Frostee Flakes, how much
should Tastee Mart order in each replenishment lot? If a trade promotion lowers the price of
Frostee Flakes to $1.80 for a month, how much should Tastee Mart order given the short-term
price reduction?
4) Describe the impact of trade promotions on cycle inventory.
5) Discuss the characteristics of a successful multi-echelon supply chain.