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Appendix III
Inventory Management
Answer Key
True / False Questions
1. The EOQ model is a mathematical tool for determining the order quantity that maximizes
the costs of ordering and holding inventory.
2. Inventory decisions involve a delicate balance between three classes of costs: ordering
costs, advertising costs, and shipping costs.
3. The key to the JIT system is the “pull” approach to controlling manufacturing.
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4. The EOQ approach takes the view that no inventory is necessary and can be acquired as
needed.
5. Some of the ways that JIT efficiencies are achieved are through reducing the number of
vendors, negotiating long-term supply agreements, making less frequent payments, and
eliminating inspections.
Multiple Choice Questions
6. Inventory holding costs typically include:
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7. Inventory holding costs would typically include all of the following except:
8. Which of the following is classified as an inventory shortage cost?
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9. At the economic order quantity:
10. Lagoon Enterprises uses an economic order quantity model and has determined an optimal
order size of 500 units. Annual demand is 10,000 units, ordering costs are $50 per order, and
holding costs are $4 per unit. The company’s annual ordering and holding costs total:
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Use the following information to answer questions 11 & 12.
Dazzle Graphics uses a special purpose paper on 80% of its jobs. The paper is purchased in
100-sheet packages at a cost of $100 per package. Management estimates that the cost of
placing and receiving a typical order is $15, and the annual cost of carrying a package in
inventory is $1.50. Dazzle uses 2,600 packages each year. Production is constant, and the lead
time to receive an order is 1 week.
11. The economic order quantity is approximately:
12. The reorder point is:
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13. When comparing EOQ and JIT inventory systems, which of the following statements is
false?
14. Which of the following does not minimize ordering costs when using JIT purchasing?
15. When graphing the EOQ, which of the following statements is false?
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16. When considering safety stock and its effect on EOQ, which of the following statements is
false?
Essay Questions
17. Economic Order Quantity, timing of orders and safety stock are three important
considerations in inventory management.
Required:
A. Explain each of these considerations.
B. How is EOQ affected by the timing of orders and safety stock?
Solution:
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18. Broadbent Industries carries a part that is popular in the manufacture of automatic
sprayers. Demand for this part is 4,000 units per year; order costs amount to $30 per order,
and holding costs total $1.50 per unit. The company is considering the implementation of an
economic order quantity model in an effort to better manage its inventories.
Required:
A. Compute the economic order quantity.
B. Compute total annual inventory costs if Broadbent follows the EOQ policy.
Solution:
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19. Broadbent Industries carries a part that is popular in the manufacture of automatic
sprayers. Demand for this part is 4,000 units per year; order costs amount to $30 per order,
and holding costs total $1.50 per unit.
The company, which currently places four orders per year with its suppliers, is considering
the implementation of an economic order quantity (EOQ) model to better manage its
inventories. Preliminary EOQ calculations revealed an optimal order quantity of 400 units and
total annual inventory costs of $600.
Required:
A. In comparison with its current policy, how much will Broadbent save by adopting the EOQ
model?
B. Briefly explain the philosophical difference between the EOQ model and the just–in-time
model. Which of the two models will likely result in lower holding costs for the firm? Why?
Solution:
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20. What is the disadvantage of using the tabular method to identify the economic order
quantity?
Solution: