7) Which one of the following is not an assumption of the EOQ model?
A) Decisions for one item can be made independently of decisions made for other items.
B) There is no uncertainty in lead-time.
C) The amount of an order received is exactly equal to what was ordered, without any “short shipments”
from a supplier or scrap losses in the shop.
D) Quantity discounts can be taken advantage of for large lot sizes.
8) Which one of the following statements regarding the economic order quantity (EOQ) is true?
A) The EOQ model combines several different item orders to the same supplier.
B) If an order quantity is larger than the EOQ, the annual holding cost for cycle inventory exceeds the
annual ordering cost.
C) The EOQ model assumes a variable demand pattern.
D) When the interest rate drops, the inventory holding cost decreases and the EOQ decreases.
9) Which one of the following statements concerning the economic order quantity (EOQ) model is true?
A) An increase in holding cost will increase the EOQ.
B) A decrease in demand will increase the EOQ.
C) A decrease in holding cost will increase the EOQ.
D) None of the above is true.
10) Which one of the following statements concerning the economic order quantity (EOQ) is true?
A) The EOQ is the order quantity that minimizes annual inventory holding costs.
B) An increase in demand will increase the EOQ.
C) The time between orders (TBO) will increase with an increase in holding costs.
D) The EOQ formula assumes that there are only three relevant costs: holding, transportation, and setup.
11) You have taken a job in industry and are facing your first ordering decision. As you prepare to place
the order, you remember your instructor teaching you that you would not use the EOQ formula if:
A) you followed a make-to-stock strategy for an item with stable demand.
B) your carrying costs and ordering costs are known and relatively stable.
C) the order size is constrained by capacity limitations such as the number or size of the delivery trucks.
D) your setup costs and holding costs remain constant and can be determined.
12) A company operating under an EOQ policy enjoys rising annual demand for their products for three
consecutive years. During this time their holding cost and ordering cost remain constant. Which
statement is best?
A) Their order quantity will fall and so will the time between orders.
B) Their order quantity will fall but the time between orders will rise.
C) Their order quantity will rise but the time between orders will fall.
D) Their order quantity will rise and so will the time between orders.
13) The Lemma Company manufactures and sells 10 products. Ways have been found to cut both the
setup and inventory holding costs in half. What effect will this have on the economic order quantities of
the 10 products?
A) They will be reduced by a factor of 1.41.
B) They will not change.
C) They will be reduced by a factor of 2.00.
D) They will be increased by a factor of 1.41.
14) Sensitivity analysis on the economic order quantity (EOQ) formula can help the operations manager
answer several questions on how to manage inventories. Which one of the following questions is not
answered by EOQ sensitivity analysis?
A) How critical are errors in estimating demand (D), inventory holding cost (H), and setup cost (S)?
B) What should happen to lot sizes if interest rates drop?
C) What should happen to cycle inventory if the demand rate increases?
D) What should happen to lot sizes if supply and lead-time uncertainty increase?
15) Vilas County Hospital consumed 400 boxes of bandages per week last year. The price of bandages
was $80 per box, and the hospital operates 52 weeks per year. The cost of processing an order was $64,
and the cost of holding one box throughout a full year was 20% of the value of the material. Last year the
hospital ordered bandages, on average, once every two weeks, each time ordering 800 boxes. What extra
cost did the hospital incur that could have been avoided if the EOQ concept had been applied?
A) less than or equal to $650
B) more than $650 and less than $1,050
C) more than $1,050 and less than $1,450
D) more than $1,450
Scenario 9.3
The Talbot Company uses electrical assemblies to produce an array of small appliances. One of its high
cost / high volume assemblies, the XO-01, has an estimated annual demand of 8,000 units. Talbot
estimates the cost to place an order is $50, and the holding cost for each assembly is $20 per year. The
company operates 250 days per year.
16) Use the information in Scenario 9.3. What is the economic order quantity for the XO-01?
A) less than or equal to 100 units
B) greater than 100 units but less than or equal to 180 units
C) greater than 180 units but less than or equal to 250 units
D) greater than 250 units
17) Use the information in Scenario 9.3. What is the annual inventory holding cost if Talbot orders using
the EOQ quantity?
A) less than or equal to $1,500
B) greater than $1,500 but less than or equal to $4,000
C) greater than $4,000 but less than or equal to $6,500
D) greater than $6,500
18) Use the information in Scenario 9.3. What is the annual ordering cost if Talbot orders using the EOQ
quantity?
A) less than or equal to $1,000
B) greater than $1,000 but less than or equal to $2,500
C) greater than $2,500 but less than or equal to $4,000
D) greater than $4,000
19) Use the information in Scenario 9.3. What is the total annual holding and ordering costs if Talbot
orders using the EOQ quantity?
A) greater than $7,000
B) greater than $5,000 but less than or equal to $7,000
C) greater than $2,500 but less than or equal to $5,000
D) less than or equal to $2,500
20) Use the information in Scenario 9.3. What is the cycle length (time between orders) when orders are
placed using the EOQ quantity?
A) less than 5 days
B) greater than 5 days but less than or equal to 10 days
C) greater than 10 days but less than or equal to 15 days
D) greater than 15 days
21) Use the information in Scenario 9.3. How many times per year must Talbot order the XO-01 when
orders are placed using the EOQ quantity?
A) less than 10 times per year
B) greater than 10 times but less than or equal to 20 times per year
C) greater than 20 times but less than or equal to 30 times per year
D) greater than 30 times per year
22) Use the information in Scenario 9.3. The purchasing manager decides that, in order to save purchasing
time, orders for the XO-01 will be placed every three months, or four times per year. How much does this
approach cost Talbot in total annual holding and ordering costs (instead of Talbot ordering using the
EOQ quantity)?
A) greater than $18,000
B) greater than $14,000 but less than or equal to $18,000
C) greater than $10,000 but less than or equal to $14,000
D) less than or equal to $10,000
Scenario 9.4
The Mwongola Company is a small manufacturing company that uses gear assemblies to produce four
different models of mountain bikes. One of these gear assemblies, the “Smooth Shifter”, is used for the
two most expensive of Burdell’s four models, and has an estimated annual demand of 300 units. Burdell
estimates the cost to place an order is $40, and the holding cost for each assembly is $60 per year. The
company operates 250 days per year.
23) Use the information in Scenario 9.4. What is the economic order quantity for the Smooth Shifter?
A) less than or equal to 40 units
B) greater than 40 units but less than or equal to 80 units
C) greater than 80 units but less than or equal to 120 units
D) greater than 120 units
24) Use the information in Scenario 9.4. What is the annual inventory holding cost if Mwongloa orders
using the EOQ quantity?
A) less than or equal to $300
B) greater than $300 but less than or equal to $500
C) greater than $500 but less than or equal to $700
D) greater than $700
25) Use the information in Scenario 9.4. What is the annual ordering costs if Mwongola orders using the
EOQ quantity?
A) less than or equal to $200
B) greater than $200 but less than or equal to $350
C) greater than $350 but less than or equal to $500
D) greater than $500
26) Use the information in Scenario 9.4. What is the total annual holding and ordering costs if Mwongola
orders using the EOQ quantity?
A) greater than $1,500
B) greater than $1,000 but less than or equal to $1,500
C) greater than $750 but less than or equal to $1,000
D) less than or equal to $750
27) Use the information in Scenario 9.4. What is the cycle length (time between orders) when orders are
placed using the EOQ quantity?
A) less than or equal to 5 days
B) greater than 5 days but less than or equal to 10 days
C) greater than 10 days but less than or equal to 15 days
D) greater than 15 days
28) Use the information in Scenario 9.4. How many times per year must Mwongola order the Smooth
Shifter when orders are placed using the EOQ quantity?
A) less than or equal to 10 times per year
B) more than 10 times but fewer than or equal to 20 times per year
C) more than 20 times but fewer than or equal to 30 times per year
D) more than 30 times per year
29) Use the information in Scenario 9.4. The purchasing manager decides that, in order to save purchasing
time, orders for the Smooth Shifter will be placed once a month, or twelve times per year. How much
does this approach cost Mwongola in additional annual holding and ordering costs (instead of Mwongola
ordering using the EOQ quantity)?
A) more than $500
B) more than $200 but less than or equal to $500
C) more than $50 but less than or equal to $200
D) less than or equal to $50
Scenario 9.5
Tom Bergman, owner and operator of the Earplug Superstore, is reviewing the costs associated with the
store’s best-selling hearing aid, the BZ15. The data available to Dr. Bergman concerning this device follow.
Demand = 25 units/week
Order cost = $3/order
Holding cost = $1.50/unit/year
The Earplug Superstore operates 52 weeks a year.
30) Use the information in Scenario 9.5. If Tom decides to order at the economic order quantity, what is
the sum of the annual ordering cost and holding cost?
A) less than or equal to $90
B) greater than $90 but less than or equal to $100
C) greater than $100 but less than or equal to $115
D) greater than $115
31) Use the information in Scenario 9.5. Tom cuts the ordering cost in half by implementing a streamlined
processing system. How many fewer units should he now order each time he places an order?
A) less than or equal to 10 units
B) greater than 10 but less than or equal to 15 units
C) greater than 15 but less than or equal to 20 units
D) greater than 20 units
32) Use the information in Scenario 9.5. If Tom orders a one-year supply at a time, how much higher are
his total (ordering and holding) costs compared to total costs incurred if he ordered at his EOQ?
A) less than or equal to $600
B) greater than $600 but less than or equal to $700
C) greater than $700 but less than or equal to $800
D) greater than $800
33) Use the information in Scenario 9.5. If Tom orders at the economic order quantity, how many units
does he order at a time?
A) less than or equal to 75 units
B) greater than 75 but less than or equal to 150 units
C) greater than 150 but less than or equal to 250 units
D) greater than 250 units
34) Use the information in Scenario 9.5. If Tom orders such that his annual holding cost is twice what his
annual ordering cost is, how many units at a time is he ordering?
A) less than or equal to 100 units
B) greater than 100 but less than or equal to 105 units
C) greater than 105 but less than or equal to 110 units
D) greater than 110 units
35) A neighborhood sportswear store sells a pair of Victoria sneakers for $40. Due to the recent fitness
craze, these shoes are in high demand: 50 pairs of shoes are sold per week. The ordering cost is $20 per
order, and the annual holding cost is 20% of the selling price. If the store operates 52 weeks a year, what
can you say about the current lot size of 235?
A) too large
B) too small
C) just right
D) cannot tell from the information given
36) An item experiences an annual demand of 7,200 units. It costs $8 to hold an item in inventory for one
year and $16 to place an order. If the EOQ model is used, what is the time between orders? Assume that
there are 52 business weeks in a year.
A) less than 1 week
B) greater than 1 week but less than or equal to 2 weeks
C) greater than 2 weeks but less than or equal to 3 weeks
D) greater than 3 weeks
37) Use the information in Scenario 9.6. If Bonpensiero uses the EOQ model, how frequently must she
place orders for this item?
A) every week
B) every 2 weeks
C) every 3 weeks
D) every 4 weeks
38) Use the information in Scenario 9.6. Due to new ordering procedures initiated by Bonpensiero, the
ordering cost is drops to $4 per order. At the same time, the weekly demand increases to 64 units per
week due to an increase in business. What effect do these changes have on the EOQ quantity for this
item?
A) The EOQ quantity remains unchanged.
B) The EOQ quantity increases by 20%.
C) The EOQ quantity decreases by 20%.
D) Sufficient information is not available to answering this question.
39) Use the information in Scenario 9.7. What is the EOQ for these papers?
A) less than or equal to 3,000 units
B) greater than 3,000 units but less than or equal to 4,000 units
C) greater than 4,000 units but less than or equal to 5,000 units
D) greater than 5,000 units
Scenario 9.8
A company operating under a continuous review system has an average demand of 50 units per week for
the item it produces. The standard deviation in weekly demand is 20 units. The lead-time for the item is
six weeks, and it costs the company $30 to process each order. The holding cost for each unit is $10 per
year. The company operates 52 weeks per year.
40) Use the information in Scenario 9.8. What is the economic order quantity (EOQ) for this item?
A) less than or equal to 175 units
B) greater than 175 units but less than or equal to 200 units
C) greater than 200 units but less than or equal to 225 units
D) greater than 225 units
Scenario 9.9
“Gollee those cats sure go through a lot of food,” Geoff exclaimed as he saw the shopping list pad that had
been pre-printed with the words “cat food” at the top. He pondered a different approach to shopping for
the furry little darlings, reviewed his shopping records, and discovered the following. The price of cat
food has held steady at 89 cents per can. Despite feigning indifference, each of the seven cats nibbles their
way through an average of one can per day, three hundred sixty five days a year. The price of gasoline
has held constant at $3.50 per gallon and his pickup uses a gallon each way to the cat food store. The cost
to hold a can of cat food is 10% of the unit price.
41) Using the information in Scenario 9.9 determine the economic order quantity for cat food.
A) 634 cans
B) 448 cans
C) 239 cans
D) 169 cans
42) Use the information in Scenario 9.9 to determine the average number of orders per year if Geoff
adopts an EOQ policy.
A) 3 orders per year
B) 4 orders per year
C) five orders per year
D) six orders per year
43) Use the information in Scenario 9.9 to determine the annual setup cost if Geoff follows an EOQ policy
to obtain cat food.
A) $112
B) $14
C) $28
D) $56
44) Use the information in Scenario 9.9 to determine the combined cost of goods and inventory if Geoff
decides to follow the economic order quantity model?
A) $2,415
B) $2,218
C) $2,274
D) $2,330
45) Use the information in Scenario 9.9 to determine the amount of time in-between trips to the cat food
store if Geoff wisely elects to follow an EOQ policy for obtaining cat food.
A) about three months
B) about three weeks
C) about six months
D) about three days
46) Use the information in Scenario 9.9 to determine the average pantry space occupied by cat food if each
can takes up 13 cubic inches and Geoff obeys an EOQ policy for managing the cat food purchase process.
A) 2.4 cubic feet
B) 24 cubic feet
C) 4.8 cubic feet
D) 12 cubic feet
47) The number of setups (or orders) per year is determined by the annual demand and ________.
48) The ________ determines the frequency and quantity to order.
49) A ________ is an incentive to order larger quantities, where the price per unit decreases when the
order is sufficiently large.
50) If an item is ordered using an EOQ policy, as the annual demand for an item decreases, the EOQ for
the item ________.
51) In an EOQ model, as the annual demand for an item increases, the EOQ for the item ________.
52) In an EOQ model, as the ordering cost for an item decreases, the EOQ for the item ________.
53) In an EOQ model, as the annual holding cost for an item increases, the EOQ for the item ________.
54) The ________ is the average elapsed time between receiving replenishment orders of Q units for a
particular lot size.
55) What assumptions are made in calculating the economic order quantity? Which of these assumptions
is the least realistic? Why?
56) What production strategies should not employ an EOQ approach to ordering? Why?
36
57) Sketch the EOQ cost curves and describe their derivation.
58) A Theory of Constraints (TOC) advocate visits your factory and seems bemused by your use of EOQ
to set your batch sizes. You launch into a brilliant defense of the EOQ. The TOC advocate grabs a piece of
chalk and proceeds to sketch two sets of inventory cost curves on your pristine shop floor. What will his
two different sets of cost curves look like and why?
Answer: One possible problem with your use of EOQ might arise if the TOC advocate (or the student
answering the question) has read the supplement on special inventory models and realizes that
production rate and consumption rate should be used to tweak the basic EOQ analysis. If the TOC
59) A company governed by an EOQ system decides to move in a more lean direction and hopes to
reduce their Q as much as possible. What specific steps might be taken to help them in their journey
towards a Q = 1?
Answer: Starting with the EOQ equation, the company can reduce D and S while increasing H (they can’t
do much about 2). Of these three parameters, reducing D is probably the least attractive option if it
60) An assistant manager is reviewing the costs associated with the store’s best-selling product. The data
available follows.
Demand = 500 units/year
Order cost = $40/order
Holding cost = $7/unit/year
a. What is the EOQ and its associated ordering and holding costs?
b. If annual demand doubles and all other costs remain the same, what is the new EOQ and total annual
cost?
61) An assistant manager is reviewing the costs associated with one of the store’s better–selling products.
The data available follows.
Demand = 400 units/year
Order cost = $25/order
Holding cost = 50¢/unit/year
a. They currently order a one-year supply. What are the total annual ordering cost and holding cost for
this order size?
b. What would be the EOQ and its associated ordering and holding costs?
62) A store has collected the following information on one of its products:
Demand = 5,000 units/year
Ordering costs = $12/order
Holding costs = $4/unit/year
Lead-time = 5 days weeks
Unit cost = $748/unit
Number of weeks per year = 50 weeks
a. The firm currently orders 500 units per order. What is the total cost of ordering and holding these
goods under this system?
b. Determine their economic order quantity and cost of ordering and holding goods using the EOQ.
c. Form the ratio of the order quantities under the old policy and EOQ. Form the ratio of the EOQ to the
old order quantity. Then form the ratio of their total system costs under the two ordering policies.
Average these two ratios and compare this number with the ratio of the old total cost with the total cost
under an EOQ policy.
d. How do they compare?
9.6 Continuous Review System
1) If on-hand inventory = 100 units, scheduled receipts = 100 units and backorders = 100 units, the
Inventory Position (IP) is the sum of the three, or 300 units.
2) If on-hand inventory = 100 units, scheduled receipts = 100 units and backorders = 100 units, the
Inventory Position (IP) is 100 units.
3) A continuous review system is sometimes called a reorder point system.
4) A continuous review system is sometimes called a fixed interval reorder system.
5) The scheduled receipts are orders that have been placed but not yet received.
6) As the service level increases, the probability of not running out of stock during a cycle decreases.