Chapter 24 – Quantitative models for the planning and control of stocks
MULTIPLE CHOICE
1. If inventory is purchased from an outside supplier, the inventory-related costs are
a.
ordering and carrying costs.
b.
setup and carrying costs.
c.
ordering and setup costs.
d.
none of the above.
2. If inventory is produced internally, the inventory-related costs are
a.
ordering and carrying costs.
b.
setup and carrying costs.
c.
ordering and setup costs.
d.
none of the above.
3. Which of the following is NOT considered an ordering cost?
a.
inventory taxes
b.
insurance cost on shipment
c.
cost of processing an order
d.
unloading costs
4. Placing large, infrequent orders minimizes
a.
ordering cost.
b.
carrying cost.
c.
stockout cost.
d.
all of the above.
5. Ordering frequently in small lot sizes minimizes
a.
ordering cost.
b.
carrying cost.
c.
stockout cost.
d.
all of the above.
6. The cost of interrupted production is considered part of the
a.
setup cost.
b.
ordering cost.
c.
carrying cost.
d.
stockout cost.
7. Economic order quantity refers to the order size that
a.
minimizes the size of the order.
b.
minimizes the carrying costs associated with inventory.
c.
minimizes total inventory costs.
d.
minimizes the ordering costs associated with inventory.
8. The reorder point for inventory depends upon which of the following factors?
a.
the economic order quantity
b.
the lead time between placing an order and its availability for use
c.
the rate of usage during lead time
d.
all of the above
9. The reorder point for inventory is calculated as
a.
Rate of usage Lead time.
b.
(Maximum usage + Average usage) Lead time.
c.
(Maximum usage – Average usage) Lead time.
d.
none of the above.
10. Safety stock is an attempt to manage fluctuations in
a.
inventory price.
b.
demand.
c.
lead time.
d.
all of the above.
11. JIT reduces lead times to meet delivery dates by
a.
reducing setup times.
b.
expediting delivery to customers.
c.
having more inventory available.
d.
working overtime to fill orders.
12. JIT avoids shutdowns due to materials shortages in all of the following ways EXCEPT
a.
using total preventive maintenance.
b.
holding inventory.
c.
using total quality control to reduce defective materials.
d.
working with suppliers to ensure the availability of materials.
13. JIT purchasing is done using
a.
short-term contracts that emphasize price.
b.
long-term contracts based on quality, reliability, and price.
c.
short-term contracts based on quality, reliability, and price.
d.
inventory to hedge against stockouts and price increases.
14. One of the traditional reasons for holding inventory is to minimize total carrying costs and setup costs.
The JIT solution is to
a.
reduce setup costs.
b.
reduce lead time.
c.
use total preventive maintenance.
d.
use total quality control.
Figure 24-1
Mrs. Brown’s Bagel Company manufactures specialty bagels. The company buys flour in 50-kg bags
that cost £25 each. The company uses 10,000 bags per year, and usage occurs evenly throughout the
year.
The average cost to carry a 50-kg bag in inventory per year is £4, and the cost to place an order is £10.
The company works 250 days per year.
Mrs. Brown’s Bagel Company manufactures specialty bagels. The company buys flour in 50-kg bags
that cost £25 each. The company uses 10,000 bags per year, and usage occurs evenly throughout the
year.
The average cost to carry a 50-kg bag in inventory per year is £4, and the cost to place an order is £10.
The company works 250 days per year.
15. Refer to Figure 24-1. Brown’s economic order quantity is
a.
354 bags.
b.
447 bags.
c.
224 bags.
d.
100 bags.
16. Refer to Figure 24-1. If Brown’s lead time is three working days and the average rate of usage is 40
bags per day, the reorder point would be
a.
140 bags.
b.
120 bags.
c.
100 bags.
d.
80 bags.
17. Refer to Figure 24-1. If Brown’s lead time is four working days, the average rate of usage is 40 bags
per day, and the company carries a safety stock of 20 bags, the reorder point would be
a.
180 bags.
b.
140 bags.
c.
160 bags.
d.
100 bags.
Figure 24-2
Hapsburg Manufacturing purchases components produced by Little Company in the manufacture of its
main product. For the next year, Hapsburg expects to use a total of 20,000 parts. Hapsburg typically
orders 2,000 units at a time. The cost of placing an order is £100, and the average annual cost of
carrying one unit of inventory is £5.
18. Refer to Figure 24-2. Hapsburg’s total ordering cost is
a.
£1,000.
b.
£5,000.
c.
£10,000.
d.
£500.
19. Refer to Figure 24-2. Hapsburg’s total carrying cost is
a.
£100,000.
b.
£10,000.
c.
£50,000.
d.
£5,000.
20. Refer to Figure 24-2. Hapsburg’s total inventory cost is
a.
£5,100.
b.
£6,000.
c.
£10,000.
d.
£20,000.
21. Perch Pro Shops sells an average of 200 lures per day. The lead time required to receive lures from the
supplier is four days. What is Perch’s reorder point?
a.
100 lures
b.
200 lures
c.
300 lures
d.
800 lures
22. March Manufacturing uses an average of 150 components per day, although usage can run as high as
175 components per day. If lead time is three days, how much safety stock should March have on
hand?
a.
75 components
b.
450 components
c.
510 components
d.
150 components
23. July Manufacturing uses an average of 150 units per day, although usage can run as high as 175 units
per day. If July maintains a recommended amount of safety stock and lead time is three days, what is
July’s reorder point?
a.
450 units
b.
510 units
c.
525 units
d.
600 units
Figure 24-3
Cozy Stoves produces wood-burning stoves. In order to produce the frames for the stoves, special
equipment must be set up. The setup cost per frame is £40. The cost of carrying frames in inventory is
£5 per frame per year. The company produces 100,000 stoves per year.
24. Refer to Figure 24-3. The number of frames that Cozy Stoves should produce per setup in order to
minimize the total setup and carrying costs is
a.
2,828 frames.
b.
1,265 frames.
c.
894 frames.
d.
566 frames.
25. Refer to Figure 24-3. Cozy Stoves’ total setup costs associated with the economic order quantity are
a.
£3,953.
b.
£3,612.
c.
£3,162.
d.
£1,778.
26. Refer to Figure 24-3. Cozy Stoves’ total carrying costs associated with the economic order quantity are
a.
£3,612.
b.
£3,162.
c.
£506.
d.
£316.
Figure 24-4
Buckner Manufacturing purchases components produced by Cochran Company in the manufacture of
their main product. For the next year, Buckner expects to use a total of 30,000 parts. Buckner typically
orders 500 units at a time. The cost of placing an order is £40, and the average annual cost of carrying
one unit of inventory is £2.
27. Refer to Figure 24-4. Buckner’s total ordering cost is
a.
£120.
b.
£2,000.
c.
£2,400.
d.
£500.
28. Refer to Figure 24-4. Buckner’s total carrying cost is
a.
£1,000.
b.
£500.
c.
£2,400.
d.
£2,900.
29. Refer to Figure 24-4. Buckner’s total inventory cost is
a.
£2,900.
b.
£1,000.
c.
£3,400.
d.
£2,000.
30. Enchanted Acres sells an average of 6,000 bags of flower seed daily. The lead time required to receive
seed from the supplier is four days. What is Enchanted Acres’ reorder point?
a.
1,500 bags
b.
6,000 bags
c.
12,000 bags
d.
24,000 bags
31. Kali Manufacturing uses an average of 2,000 components per day, although usage can run as high as
2,500 components per day. If lead time is four days, how much safety stock should Kali have on hand?
a.
10,000 components
b.
8,000 components
c.
2,500 components
d.
2,000 components
32. Brock Manufacturing uses an average of 2,000 units per day, although usage can run as high as 2,500
units per day. If Brock maintains a recommended amount of safety stock and lead time is four days,
what is Brock’s reorder point?
a.
12,000 units
b.
10,000 units
c.
8,000 units
d.
2,000 units
33. Which of the following is NOT an opportunity cost associated with inventory management?
a.
lost sales to customers
b.
use of capital tied up in inventory investment
c.
cost of expediting
d.
all are opportunity costs
Figure 24-5
Big Bus Company produces buses. In order to produce the seats for the buses, special equipment must
be set up. The setup cost per frame is £40. The cost of carrying seats in inventory is £5 per seat per
year. The company produces 100,000 buses per year.
34. Refer to Figure 24-5. The number of seats that should be produced per setup in order to minimize the
total setup and carrying costs is
a.
2,828 seats.
b.
1,265 seats.
c.
894 seats.
d.
566 seats.
35. Refer to Figure 24-5. Total setup costs associated with the economic order quantity are
a.
£3,953.
b.
£3,612.
c.
£3,162.
d.
£1,778.
1.
Develop long-term relations with limited suppliers.
2.
Emphasize service and quality in the selection of vendors.
3.
Establish procedures allowing production employees decision freedom to order raw materials.
4.
Establish procedures to have raw materials delivered directly to the work stations.
SHORT ANSWER
1. Briefly explain just-in-time (JIT) inventory management.
2. What is Just-in–time inventory management? What are the four just-in-time approaches to reducing
raw materials inventory?
PROBLEM
1. The Arizona Company manufactures cactus candy. The company buys sugar used in the candy in
10-kg boxes that cost £10 each. The company uses 60,000 boxes per year, and usage occurs evenly
throughout the year.
The average cost to carry a 10-kg box in inventory per year is £6, and the cost to place an order is £4.
Required:
a.
Determine the economic order quantity for the sugar in terms of 10-kg boxes.
b.
If the company works 250 days per year, on the average, how many boxes of sugar are used
per working day?
c.
If the lead time for an order is normally five working days, determine the reorder point for
sugar.
d.
If 100 boxes of sugar are carried as safety stock, determine the reorder point for the sugar.
283 boxes
b.
240 boxes 60,000 boxes/250 days
1,200 boxes (240 boxes 5 days)
1,300 boxes (240 boxes 5 days) + 100 boxes
2. Nazca Company uses 48,000 grams of silver each year to produce jewelry. The cost of placing an
order is £150. The annual cost of holding one gram of silver is £3. Nazca currently places 12 orders of
4,000 grams each.
Required:
a.
Compute the annual cost of the current inventory policy.
b.
Compute the cost that Nazca would incur if it used economic order quantity.
c.
Compute the amount that Nazca would save if it used economic order quantity rather than
the current policy.
3. Smart Manufacturing uses an average of 20,000 components per day, although usage can run as high
as 22,500 components per day. Lead time required for placing an order is four days.
Required:
a.
Determine Smart’s reorder point without safety stock.
b.
Determine Smart’s safety stock.
c.
Determine Smart’s reorder point with safety stock.
80,000 units (20,000 components 4 days)
10,000 units [(22,500 components – 20,000 components) 4 days]
90,000 units (80,000 units + 10,000 units)
4. Merrill Manufacturing produces stainless steel sinks. In order to produce the sinks, special equipment
must be set up. The setup cost per sink is £10. The cost of carrying sinks in inventory is £1.25 per sink
per year. The company produces 50,000 sinks per year.
Required:
a.
Compute the number of sinks that should be produced per setup in order to minimize the
total setup and carrying costs.
b.
Compute the total setup and carrying costs associated with the economic order quantity.
(Round to the nearest £.)
5. Bernard Company uses 6,000 grams of silver each year to produce jewelry. The cost of placing an
order is £2,000. The annual cost of holding one gram of silver is £50. Bernard currently places four
orders of 1,500 grams each.
Required:
a.
Compute the annual cost of the current inventory policy.
b.
Compute the cost that Bernard would incur if it used economic order quantity.
c.
Compute the amount that Bernard would save if it used economic order quantity rather
than the current policy.
6. Following is information pertaining to material that is used in the assembly of automobiles:
Total setup costs = [£10 (50,000/894)] = £559
Total carrying costs = [£1.25 (894/2)] = £559
Annual demand
4,000 units
Unit cost
£25
Cost of placing an order
£600
Carrying cost as a percentage of unit cost
10%
Required:
a.
Calculate total annual carrying costs for an order quantity of 200 units per order.
b.
Calculate total annual ordering costs for an order quantity of 200 units per order.
c.
Determine the optimal order size.
7. Evans Company has the following information:
Annual demand
4,000 units
Order size
1,000 units
Ordering cost per order
£500
Carrying costs per unit for one year
£50
Lead time (maximum 20 days)
10 days
Maximum daily use
25 units
Work year
250 days
Required:
a.
Determine the economic order quantity for Evans.
b.
What is the annual savings to Evans Company if it was to change from an order size of 1,000
to the economic order quantity?
c.
What is the reorder point?
d.
What is the safety stock needed to prevent stockouts?
b.
Total costs (1,000 units) =
[£500 (4,000/1,000)] + [£50 (1,000/2)] =
Total costs (282.84 units) =
[£500 (4,000/282.84)] + (£50 (282.84/2)] =
Annual savings
Daily demand = (4,000/250) = 16 units per day
d.
Maximum demand per day
25 units
(£25 0.10) (200/2) = £250
£600 (4,000/200) = £12,000
8. Answer the following questions pertaining to just-in-time inventory management:
a.
Identify key elements of the JIT philosophy.
b.
What elements of the JIT approach contribute to reducing materials inventory?
c.
Why do proponents of JIT believe inventory is an enemy?
and increased product quality and employee involvement.
supplier deliveries directly to the shop floor.
costs, increases production times, and hides quality problems.
ESSAY
1. Describe the traditional inventory management model.
2. Describe just-in–time (JIT) inventory management.
