# Chapter 12 Class A items account for 5 to 15 percent of

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Test Prep

Book Title

OM 5 5th Edition

Authors

David Alan Collier, James R. Evans

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OM5 C12

Test Bank

Chapter 12—Managing Inventories

Multiple Choice

1. Which of the following is NOT TRUE regarding inventory management?

a. The two fundamental inventory decisions are: where to order and what to order.

b. Inventory management applies to goods and to services.

c. Different types of inventory characteristics require different approaches for control.

d. Stock-keeping units (SKUs) are often aggregated or partitioned into groups with similar

characteristics or dollar value.

2. _____ inventory consists of partially completed products in various stages of completion that

are awaiting further processing.

a.

Raw materials

b.

Work-in-process (WIP)

c.

Cycle

d.

Safety stock

3. Additional inventory that is kept over and above the average amount required to meet

demand is called _____ inventory.

a.

seasonal

b.

work-in-process

c.

finished goods

d.

safety stock

4. _____ inventory acts as a buffer between workstations in flow shops or departments in job

shops to enable the operating process to continue.

a.

Raw materials

b.

Work-in-process

c.

Cycle stock

d.

Safety stock

5. Costs associated with configuring tools, equipment, and machines within a factory to produce

an item are components of _____ costs.

a.

ordering

b.

inventory-holding

c.

shortage

d.

unit

2

6. Which of the following is NOT a component of holding cost?

a.

Tax

b.

Insurance

c.

Material handling

d.

Order processing

7. Costs associated with backordering products are called _____ costs.

a.

holding

b.

shortage

c.

ordering

d.

setup

8. Which of the following statements is TRUE?

a. Inventory is any physical asset held for future use or sale.

b. When using ABC analysis, C items require close control by operations managers as they

account for a large dollar value but a relatively small percentage of total items.

c. Dependent demand is directly related to the demand of other stock-keeping units (SKUs) and

can be calculated without needing to be forecasted.

d. Stockouts occur in a fixed-quantity system (FQS) whenever the lead-time demand exceeds

the replenishment level (M).

9. Which of the following statements is NOT TRUE?

a.

Inventory is any asset held for future use or sale.

b.

When using ABC analysis, "C" items comprise of a small dollar value.

c.

Stock keeping unit (SKU) is a single item or asset stored at multiple locations.

d.

The lead time is the time between placement of an order and its receipt.

10. Independent demand:

a.

can be calculated.

b.

is related to other stock-keeping units (SKUs).

c.

is also called finished-goods inventory.

d.

needs to be forecasted.

11. Demand that incorporates uncertainty is called _____ demand.

a.

statistical

b.

average

c.

stochastic

d.

deterministic

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12. Demand that varies over time is called _____ demand.

a.

static

b.

dynamic

c.

statistical

d.

average

13. Demand that is stable over time is called _____ demand.

a.

static

b.

dynamic

c.

statistical

d.

average

14. Backorders:

a.

result from lost sales.

b.

have little financial impact.

c.

may occur as a result of a stockout.

d.

force a customer to purchase elsewhere.

15. A _____ is defined as the inability to satisfy the demand for an item.

a.

Reorder point

b.

Stockout

c.

Lost sale

d.

Backorder

16. In ABC inventory analysis, which of the following is TRUE of class C items?

a. Close control of Class C items (more than of class A or class B items) is required.

b. Class C items are critical items that must be monitored with a fixed-period system as they

have low unit costs and a high volume.

c. Class C items make up a lower percentage of total dollar value than either class A or class B

items.

d. Class C items make up for 10 to 20 percent of inventory items and 60 to 80 percent of the

total dollar usage.

17. In ABC inventory analysis, which of the following is TRUE of class A items?

a.

Class A items need not be closely controlled.

b.

Class A items account for 5 to 15 percent of the total dollar value.

c.

Class A items account for a relatively small percentage of total items.

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d.

Class A items have a relatively low volume and low unit costs compared to Class C items.

18. In ABC analysis, which of the following items typically comprise 60 to 80 percent of total

dollar usage but only 10 to 30 percent of the items?

a.

A

b.

B

c.

C

d.

B and C

For Problems #19 to #22

Brenda opens a pool and spa store in a lively shopping mall and finds business to be booming,

but she often stocks out of key items customers want. She decides to experiment with inventory

control methods such as using a fixed order quantity (FQS) and/or fixed order period (FPS)

systems. The 28-ounce bottle of Super Algaecide (SA) is a high margin stock keeping unit

(SKU), but it stocks out frequently. Ten SA bottles come in each box, and she orders boxes

from a vendor 160 miles away. Brenda is busy running the store and seldom has time to review

store inventory status and order the right quantity at the right time. She collects the following

data with respect to these SA sales.

Demand = 10 boxes per week Store operates 50 weeks/year

Order cost = $40/order Lead time = 3 weeks

Item cost = $80/box Std. deviation in weekly demand = 6

Inventory-holding cost = 15% per year Service level = 96%

19. The Economic Order Quantity (EOQ) rounded to the next highest number is:

a. less than 25 boxes.

b. more than 25 but less than or equal to 35 boxes.

c. more than 35 but less than or equal to 45 boxes.

d. more than 55 boxes.

20. If the current order quantity for SA is 20 boxes per order, how much money can she save

per year by adopting an economic order quantity (EOQ) ordering policy?

a. Less than $100

b. More than $100 but less than or equal to $200

c. More than $300 but less than or equal to $400

d. More than $400

21. The reorder point for Super Algaecide (SA) with safety stock is:

a. less than 20 boxes.

b. more than 20 but less than or equal to 30 boxes.

c. more than 30 but less than or equal to 40 boxes.

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d. more than 40 but less than or equal to 50 boxes.

22. The average number of orders per year using the economic order quantity (EOQ) is:

a. less than 6.

b. more than 6 but less than or equal to 8.

c. more than 8 but less than or equal to 10.

d. more than 12.

23. Inventory position is computed using all the following EXCEPT:

a.

on-hand quantity.

b.

scheduled receipts.

c.

backorders.

d.

lead-time demand.

24. In a fixed-quantity system (FQS), as the reorder point increases:

a.

the safety stock increases.

b.

the safety stock decreases.

c.

the number of orders increases.

d.

the number of orders decreases.

For Problems # 25 to #27

Table 1

Peterson Enterprises uses a fixed order quantity inventory control system. The firm

operates 50 weeks per year and has the following characteristics for an item:

Demand = 50,000 units/year

Ordering cost = $35/order

Inventory-carrying cost as a percent of item value = 25%

Item (Unit) value = $8

Lead time = 3 weeks

Standard deviation in weekly demand = 125 units

25. Using the information in Table 1, calculate the economic order quantity (EOQ) for this

item?

a. Less than or equal to 1200 units

b. Greater than 1200 but less than or equal to 1400 units

c. Greater than 1400 but less than or equal to 1600 units

d. Greater than 1600 units

26. Using the information in Table 1, if Peterson wishes to provide a 97 percent cycle service

level, what is the reorder point?

a. Less than or equal to 2,800 units

b. Greater than 2,800 but less than or equal to 3,200 units

c. Greater than 3,200 but less than or equal to 3,600 units

d. Greater than 3,600 units

27. The total order and inventory-holding cost is:

a. less than $1,000.

b. more than or equal to $1,000 but less than $1,500.

c. more than or equal to $1,500 but less than $2,000.

d. more than or equal to $2,000.

28. In a fixed order quantity (FOQ) system, which of the following is TRUE when interest rates

increase and all other costs remain the same?

a. Cycle inventory decreases

b. Order quantity increases

c. Order costs increase

d. Safety stock quantity increases

29. Which of the following statements is TRUE?

a.

Fixed costs associated with any ordering are relevant.

b.

Sunk costs associated with any ordering are irrelevant.

c.

Variable costs associated with inventory holding are irrelevant.

d.

Variable costs associated with ordering are irrelevant.

7

30. Which of the following is NOT a key assumption underlining the classic economic order

quantity (EOQ) model?

a.

The entire order quantity arrives in the inventory at one time.

b.

There are only two types of relevant costs: order/setup and inventory holding.

c.

Demand is assumed to be stochastic.

d.

Stockouts are not allowed.

31. Average inventory in the economic order quantity (EOQ) model is defined as:

a.

the order quantity divided by the number of inventory cycles per year.

b.

the annual usage divided by the number of inventory cycles per year.

c.

one-half of the order quantity.

d.

one-half of the annual usage.

For Problems #32 to #35

Kelly opens an aquarium store in a lively shopping mall and finds business to be booming, but

she often stocks out of key items customers want. She decides to experiment with inventory

control methods such as using a fixed order quantity (FQS) and/or fixed order period (FPS)

systems. The Fluval 303 pump, a high margin and profitable pump, is one of her best sellers,

but it stocks out frequently. She collects the following data about the pump’s sales.

Demand = 10 units per week Store operates 45 weeks/year

Order cost = $30/order Lead time = 3 weeks

Item cost = $80/pump Standard deviation of weekly demand = 4 units

Inventory-holding cost = 15% per year Desired service level = 90 percent

32. The economic order quantity (EOQ) rounded to the next highest number is:

a. less than 25 pumps.

b. more than 25 but less than or equal to 35 pumps.

c. more than 35 but less than or equal to 45 pumps.

d. more than 45 but less than or equal to 55 pumps.

33. The reorder point with safety stock rounded to the next highest whole number is:

a. less than 15 pumps.

b. more than 15 but less than or equal to 25 pumps.

c. more than 25 but less than or equal to 40 pumps.

d. more than 40 pumps.

34. If the current order quantity used by Kelly is 20 pumps per order, how much money can she

save by adopting an economic order quantity (EOQ) policy?

a. Less than $50

b. More than $50 but less than or equal to $100

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c. More than $100 but less than or equal to $150

d. more than $150

35. If Kelly decides to use a fixed-period system (FPS), the fixed-order interval (T) based on

store economics is:

a. less than or equal to 5 weeks.

b. more than 5 but less than or equal to 10 weeks.

c. more than 10 but less than or equal to 15 weeks.

d. more than 15 but less than or equal to 20 weeks.

For Problems #36 to #38

36. Using the information in Table 1, calculate the economic order quantity (EOQ) for this

item?

a. Less than or equal to 500 units

b. Greater than 500 units but less than or equal to 1,000 units

c. Greater than 1,000 units but less than or equal to 1,500 units

d. Greater than 1,500 units

37. Using the information in Table 1, if the service level is 96 percent, what is the reorder

point?

a. Less than or equal to 2,800 units

b. Greater than 2,800 but less than or equal to 3,200 units

c. Greater than 3,200 but less than or equal to 3,600 units

d. Greater than 3,600 units

38. The total order and inventory-holding cost for the economic order quantity (EOQ) is:

a. less than $1,000.

b. more than or equal to $1,000 but less than $1,500.

c. more than or equal to $1500 but less than $2,500.

Table 1

Jackson Enterprises uses a fixed order quantity inventory control system. The firm

operates 50 weeks per year and has the following characteristics for an item:

Demand = 20,000 units/year

Ordering cost = $45/order

Inventory-carrying cost as a percent of item value = 25%

Item (Unit) value = $20

Lead time = 5 weeks

Standard deviation in weekly demand = 125 units

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d. more than or equal to $2,500.

39. Which of the following statements is TRUE?

a.

The level of safety stock maintained decreases when the desired cycle service level

increases.

b.

The level of safety stock maintained decreases when the standard deviation of demand

during lead time increases.

c.

In a fixed-period inventory system, the value of Q is kept the same from one cycle to

another.

d.

In a fixed-order-quantity system, the reorder point is the average demand during the lead

time, plus the additional safety stock when demand is uncertain.

40. Which of the following statements concerning the economic order quantity (EOQ) model is

NOT TRUE when the unit holding cost increases?

a.

The economic order quantity will decrease.

b.

The number of orders per year will increase.

c.

Annual ordering costs will increase.

d.

Sunk costs will decrease.

For Problems #41 to #44

Graeme manages a candy store in a high traffic shopping mall where he has collected the

following information:

• Weekly demand for small candy boxes = 90 boxes

• Cost to place one purchase order with the box supplier = $19.80

• Cost to hold one box for one year in inventory = $2.45

• Lead time = 2 weeks

• Weeks in a year = 52 weeks

41. The economic order quantity (EOQ) is:

a. less than 100 boxes.

b. more than 100 but less than or equal to 150 boxes.

c. more than 150 but less than or equal to 200 boxes.

d. more than 200 boxes.

42. The current ordering policy for the candy store is 360 boxes so the average inventory level

(i.e.,

cycle inventory) is:

a. less than or equal to 100 boxes.

b. more than 100 but less than or equal to 150 boxes.

c. more than 150 but less than or equal to 200 boxes.

d. more than 200 but less than or equal to 250 boxes.

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43. The total order and inventory-holding cost is:

a. less than $300.

b. more than or equal to $300 but less than $400.

c. more than or equal to $400 but less than $500.

d. more than or equal to $600.

44. The optimal replenishment level for the given fixed-period system (FPS) is:

a. less than 300 boxes.

b. more than or equal to 300 but less than 400 boxes.

c. more than or equal to 400 but less than 500 boxes.

d. more than or equal to 500 boxes.

For Problems #45 to #47

Zainab opens an aquarium store in a lively shopping mall and finds business to be booming, but

she often stocks out of key items customers want. She decides to experiment with inventory

control methods such as using a fixed order quantity (FQS) and/or fixed order period (FPS)

systems. The Fluval 303 pump, a high margin and profitable pump, is one of her best sellers,

but it stocks out frequently. She collects the following data with respect to this pump’s sales:

Demand = 5 units per week Store operates 50 weeks/year

Order cost = $40/order Lead time = 3 weeks

Item cost = $80/pump

Inventory-holding cost = 15% per year

45. The economic order quantity (EOQ) rounded to the next highest number is:

a. less than 25 pumps.

b. more than 25 but less than or equal to 35 pumps.

c. more than 35 but less than or equal to 45 pumps.

d. more than 45 but less than or equal to 55 pumps.

46. If the current order quantity used by Zainab is 20 pumps per order, how much money can

she save by adopting an economic order quantity (EOQ) policy?

a. Less than $50

b. More than $50 but less than or equal to $75

c. More than $75 but less than or equal to $120

d. More than $120

47. If Zainab decides to use a fixed-period system (FPS), the fixed-order interval based on store

economics is:

a. less than 5 weeks.

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b. more than 5 but less than or equal to 10 weeks.

c. more than 10 but less than or equal to 15 weeks.

d. more than 15 but less than or equal to 20 weeks.

48. Cynthia Baker, manager of a large medical supply house that operates 50 weeks per year

and 5 days per week, has decided to implement a fixed-period inventory system for all class A

items. One such item has the following characteristics:

Demand = 10,000 units/year

Order cost = $50/order

Holding cost = $5/unit/year

If Cynthia wishes to minimize the total cost (thereby approximating the economic order

quantity (EOQ)), what should be the value of T, the number of workdays between orders (i.e.,

review period)?

a. Less than or equal to 8 days

b. Greater than 8 but less than or equal to 10 days

c. Greater than 10 but less than or equal to 12 days

d. Greater than 12 but less than or equal to 14 days

49. Two fundamental inventory decisions are: when to order and how much to order. Which of

the following statement is TRUE about fixed-quantity (FQS) and fixed-period (FPS) inventory

systems?

a. An FPS orders a fixed-period quantity when the inventory position reaches or passes the reorder

point (r).

b. An FPS must cover a time period of T + L to cover the risk of a stockout.

c. An FPS places an order for an economic order quantity (EOQ) on a continuous basis.

d. An FQS places an order to replenish the inventory position up to a target level (M) when the

inventory position reaches the reorder point (r).

50. Which is NOT a feature of the periodic review system?

a.

The order quantity, Q, is always fixed.

b.

The inventory position need not be monitored on a continuous basis.

c.

The review period, T, is constant.

d.

Placing an order is time-triggered.

51. Which of the following statements is NOT TRUE regarding the fixed-period system (FPS)?

a.

The time between orders is constant, but the order quantity might vary.

b.

An order is time-triggered, not inventory-triggered.

c.

The optimal replenishment level includes the demand during the review period, plus any

desired safety stock.

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d.

When demand is not certain, the FPS addresses stockouts by adding safety stock to the

expected demand during time T + L.

52. A fixed-period (FPS) inventory system:

a.

orders a fixed-period quantity when the inventory position reaches or drops below the

reorder point (r).

b.

chooses a replenishment level (M) which includes the demand during the review period and

lead time, plus any safety stock.

c.

maintains a constant order quantity every review period.

d.

assumes that the demand for an item is constant and continuous, and that the items are

withdrawn at a constant rate.

53. Which of the following is NOT a key input in a single-period inventory model?

a.

Probability distribution of demand

b.

Probability that demand is less than the optimal order quantity

c.

Cost per item of overestimating demand

d.

Cost per item of underestimating demand

54. In the single-period inventory model, the optimal order quantity is solved using:

a.

marginal economic analysis.

b.

total cost analysis.

c.

an ABC analysis.

d.

a reorder point analysis.

True/False Questions

1. Inventory management does not involve supplies and replacement parts.

2. An airline seat is an example of an asset held for future use or sale.

3. Safety stock inventory is an additional planned on-hand inventory that acts as a buffer to

reduce the risk of a stockout.

4. Call center phone lines are examples of inventory in service organizations.

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5. Marketing and operations generally prefer high inventory levels, while finance would prefer

small inventories.

6. Work-in-process inventory is completed products ready for distribution or sale to customers.

7. Finished-goods inventory consists of completed products that are ready for sale.

8. Setup costs depend on the number of items manufactured.

9. Inventory-holding costs are easily measured by accounting departments.

10. Costs associated with maintaining storage facilities such as gas and electricity, taxes, and

insurance are associated with fixed ordering costs.

11. Larger orders result in higher total holding cost but lower total ordering cost.

12. Opportunity cost of capital is an example of ordering cost.

13. Radio-frequency identification (RFID) tags are used to track stock-keeping units in supply

chains.

14. Many practical inventory situations include backorders and quantity discounts.

15. A stock-keeping unit is the same no matter at which location the item is found.

16. Dependent demand, unlike independent demand, needs to be forecasted.

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17. Deterministic demand always remains stable over time and does not fluctuate.

18. Stochastic demand inventory models are easier to analyze and solve than deterministic

models.

19. Airline flights to ski areas near Denver, Colorado, probably have different means and

variances throughout the year. This is an example of dynamic demand.

20. Lead time is the time it takes to prepare an order for shipping to a customer.

21. When a customer is unwilling to wait for an item that is not in stock and purchases the item

elsewhere, a backorder has occurred.

22. "C" items are the critical few that must be closely managed in an inventory system.

23. "A" items typically comprise a high percentage of total dollar usage but a low percentage of

unit volume.

24. Inventory position refers to the physical quantity of items on hand in an inventory system.

25. Because the fixed-quantity system orders the same amount each time, time between orders

will be constant, even with variable demand.

26. In a fixed quantity inventory system with certain demand, the reorder point is chosen to be

the average demand during the lead time.

27. The economic order quantity (EOQ) model follows variable lead time.

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