Chapter 20—Inventory Management: Economic Order Quantity,
JIT, and the Theory of Constraints Key
1. Effective inventory management conserves investment capital and facilitates response to customer demands.
2. Just-in-case inventory management is a traditional inventory model based on a wait-until-needed demand.
3. Ordering costs are costs of placing and receiving an order and setup costs are the costs of getting equipment
and facilities to produce products.
4. Effective inventory management does not consider inventory-related costs.
5. Competitive pressures have led many companies to favor the JIT inventory approach.
6. Firms face limited resources and limited demand for their products called constraints.
7. JIT is a manufacturing approach focused on present demand rather than anticipated demand.
8. JIT inventory management offers alternative solutions that require higher inventories.
9. JIT uses long-term contracts, continuous refilling, and electronic data interchanges to reduce or eliminate
ordering costs.
10. Reducing ordering and setup costs interfere with the reduction of inventory costs.
11. The Kanban system is an information system which ensures that parts or materials are available when
needed.
12. External constraints are imposed on a firm from within and internal constraints are imposed electronically.
13. When a product mix does not utilize fully its constraints, they are called loose constraints, when used
completely, they are called binding constraints.
14. When only one binding constraint exists, the product with the smallest contribution margin will be focused
on.
15. With multiple internal binding constraints, the optimal mix is determined by a graphical approach or the
simplex method.
16. The goal of the theory of constraints is to make money in the future by managing constraints.
17. The theory of constraints identifies a company’s constraints and exploits them.
18. Throughput is the rate at which an organization generates money through sales.
19. The theory of constraints focuses on two operational measures of system performance: inventory expenses
and operating expenses.
20. The major binding constraint in an organization is defined as the drummer, which sets the production rate
for the whole plant.
21. The costs of holding inventory are called __________ costs.
22. The traditional inventory model based on anticipated demand is called the __________ inventory
management.
23. The inventory management system which represents the continuous goal of eliminating waste is called the
__________ inventory management.
24. the process of continuous replacement of inventory has been made easier by the use of __________
interchanges.
25. the manufacturing model which shares the same practices as a JIT manufacturing system is called
__________ manufacturing.
26. The system that ensures that parts or materials are available when needed is called the __________ system.
27. The optimal mix chosen which maximizes the total contribution margin given the constraints face by a firm
is called __________ .
28. The model which expresses a constrained optimization problem as a linear objective function is called the
__________ model.
29. The focus on the goal of making money now and in the future by managing constraints is called the
__________ .
30. The __________ is the amount of inventory needed to keep the constrained resource busy for a specified
time interval.
31. Which of the following is NOT an example of an ordering cost?
32. Which of the following is NOT a cost readily identified with inventory management?
33. The cost of acquiring inventory includes
34. Which of the following is NOT considered a carrying cost?
35. The cost of holding inventory is known as
36. The cost of preparing equipment and facilities so they can be used to produce a particular product or
component is known as
37. Which of the following is NOT an opportunity cost associated with inventory management?
38. Which of the following costs are considered in the EOQ model?
39. Inventory management identifies an economic order quantity that
40. The ordering of small, frequent orders
41. Safety stock is
42. Aeroboats Frame Corporation increased the size of several inventory order quantities that had previously
been determined using the EOQ model. What is the impact on the total annual ordering costs?
43. If inventory consists of goods produced internally, the inventory-related costs are
44. Which of the following equations determines the total annual ordering costs?
45. If inventory consists of goods purchased from an outside supplier, the inventory-related costs are
46. Comfy Wheels 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 $35. The cost of carrying seats in inventory is $6 per seat per year.
The company produces 90,000 buses per year.
The number of seats that should be produced per setup in order to minimize the total setup and carrying costs is
47. Comfy Wheels 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 $35. The cost of carrying seats in inventory is $6 per seat per year.
The company produces 90,000 buses per year.
Total carrying costs (rounded to the nearest dollar) associated with the economic order quantity are
48. Comfy Wheels 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 $35. The cost of carrying seats in inventory is $6 per seat per year.
The company produces 90,000 buses per year.
Total setup costs associated with the economic order quantity are
49. Southwestern Supply Company has an economic order quantity for item A of 200 units. The annual demand
for the product is 5,000 units, and the cost of placing an order is $8. The carrying cost per unit is
50. Southwestern Supply Company has an economic order quantity for item A of 200 units. The annual demand
for the product is 5,000 units, and the cost of placing an order is $8. If the company operates 200 days a year
and the lead time for the item is five days, what is the reorder point if a safety stock of 50 units is maintained?
51. Figure 20 – 1
Moriah’s Candle Company manufactures candles. The company buys wax in 45-Kilogram containers that cost
$17 each. The company uses 25,000 containers per year, and usage occurs evenly throughout the year. The
average cost to carry a 45-Kilogram container in inventory per year is $3, and the cost to place an order is $9.
The company works 250 days per year.
Refer to Figure 20-1. The economic order quantity (rounded) is
52. Figure 20 – 1
Moriah’s Candle Company manufactures candles. The company buys wax in 45-Kilogram containers that cost
$17 each. The company uses 25,000 containers per year, and usage occurs evenly throughout the year. The
average cost to carry a 45-Kilogram container in inventory per year is $3, and the cost to place an order is $9.
The company works 250 days per year.
Refer to Figure 20-1. The lead time is 4 working days and the average rate of usage is 60 containers per day.
What is the reorder point?
53. Figure 20 – 1
Moriah’s Candle Company manufactures candles. The company buys wax in 45-Kilogram containers that cost
$17 each. The company uses 25,000 containers per year, and usage occurs evenly throughout the year. The
average cost to carry a 45-Kilogram container in inventory per year is $3, and the cost to place an order is $9.
The company works 250 days per year.
Refer to Figure 20-1. The lead time is 4 working days, the average rate of usage is 60 containers per day, and
the company carries a safety stock of 25 containers. What is the reorder point?
54. Albuquerque Company has the following information available concerning one of its inventory items:
Cost of placing an order
$50.00
Unit carrying cost per year
$2.00
Annual unit demand
3,200
Safety stock
80
Average daily demand
10
Normal lead time in days
12
The economic order quantity for this item is
55. Albuquerque Company has the following information available concerning one of its inventory items:
Cost of placing an order
$50.00
Unit carrying cost per year
$2.00
Annual unit demand
3,200
Safety stock
80
Average daily demand
10
Normal lead time in days
12
The reorder point for the inventory item is
56. Albuquerque Company has the following information available concerning one of its inventory items:
Cost of placing an order
$50.00
Unit carrying cost per year
$2.00
Annual unit demand
3,200
Safety stock
80
Average daily demand
10
Normal lead time in days
12
If there is a delay in shipping the item, approximately how many days can be covered by the safety stock?
57. Dry Creek Company decreased the size of inventory order quantities that had previously been determined
using the EOQ model. If demand remains the same, what is the impact on the number of orders made during the
year?
58. Dry Creek Company decreased the size of inventory order quantities that had previously been determined
using the EOQ model. What is the impact on the total amount of annual carrying and ordering costs?
59. The economic order quantity is the order quantity that results in
60. The order quantity used in the EOQ model is the quantity of inventory ordered
61. In the economic order quantity equation, the numerator under the square root includes
62. Alabaster Manufacturing Company increased the size of several inventory order quantities that had
previously been determined using the EOQ model. What is the impact on the total amount of annual carrying
and ordering costs?
63. Olga Company has an economic order quantity for item B of 100 units. The annual demand for the product
is 1,400 units, and the unit carrying cost per year is $7. What is the cost of placing an order?
64. Olga Company has an economic order quantity for item B of 100 units. The annual demand for the product
is 1,400 units, and the unit carrying cost per year is $7. The company operates 200 days a year, the lead time for
the item is ten days, and the safety stock is 100 units.
What is the reorder point?
65. Which of the following equations determines the total annual carrying costs when no safety stock is kept?
66. The reorder point in the EOQ model is
67. Which of the following elements could be determined by using the economic order quantity formula?
68. Figure 20 -2
Walrus Company has the following information available concerning one of its inventory items:
Cost of placing an order
$30.00
Unit carrying cost per year
$3.00
Annual unit demand
6,625
Safety stock
125
Average daily demand
25
Normal lead time in days
10
Refer to Figure 20-2. The economic order quantity for this item is
69. Figure 20 -2
Walrus Company has the following information available concerning one of its inventory items:
Cost of placing an order
$30.00
Unit carrying cost per year
$3.00
Annual unit demand
6,625
Safety stock
125
Average daily demand
25
Normal lead time in days
10
Refer to Figure 20-2. The reorder point for the inventory item is
70. Figure 20 -2
Walrus Company has the following information available concerning one of its inventory items:
Cost of placing an order
$30.00
Unit carrying cost per year
$3.00
Annual unit demand
6,625
Safety stock
125
Average daily demand
25
Normal lead time in days
10
Refer to Figure 20-2. If there is a delay in shipping the item, approximately how many days can be covered by the safety stock?
71. JIT reduces lead times to meet delivery dates by
72. Strategic objectives of JIT include
73. The JIT approach to inventory management
74. The objectives of JIT are achieved by
75. One of the traditional reasons for holding inventory is to minimize total carrying costs and setup costs. The
JIT solution is to
76. JIT purchasing is done using
77. JIT avoids shutdowns due to materials shortage in all of the following ways EXCEPT
78. One of the traditional reasons for holding inventory is to avoid shutdowns due to unavailability of materials.
The JIT solution is to
79. When comparing the traditional approach of inventory management to JIT, which of the following
statements is true?
80. One of the traditional reasons for holding inventory is to take advantage of quantity discounts and hedge
against future price increases. The JIT solution is to
81. One of the traditional reasons for holding inventory is to avoid shutdowns due to defective parts. The JIT
solution is to
82. One of the traditional reasons for holding finished goods inventories is to ensure a firm’s ability to meet
delivery dates. The JIT solution is to
83. One of the traditional reasons for holding inventory is to avoid a shutdown due to machine failure. The JIT
solution is to
84. A marker or card that signals to a supplier the quantity of materials that need to be delivered and the time of
delivery is a
85. Which of the following is NOT a common reason for shutdowns?
86. With JIT manufacturing, finished goods inventories are
87. A withdrawal Kanban specifies
88. A marker or card that specifies the quantity that a subsequent process should take from a preceding process
is a
89. The Kanban system is used to
90. A marker or card that specifies the quantity that the preceding process should manufacture is a
91. If the objective is to maximize profits in a linear programming problem, the coefficients of the variables in
the objective function should be the
92. Loose constraints are best defined as
93. Magnitude Company produces A and B with contribution margins per unit of $40 and $30, respectively.
Only 500 labor hours and 300 machine hours are available for production.
Time requirements to produce one unit of A and B are as follows:
Product A
Product B
Labor hours per unit
5
2
Machine hours per unit
1
4
What is the constraint on machine hours for Magnitude Company?
94. Figure 20-3
The following information is available for Pullaway Trailer Company, which sells two products:
Trailer A
Trailer B
Processing time
2 hours
4 hours
Vinyl cover used
16 sq. ft.
12 sq. ft.
Selling price
$50.00
$80.00
Variable cost
$35.00
$50.00
Fixed cost
$10.00
$20.00
There are 100 hours available in the plant and 75 square feet of vinyl available per operating period.
Refer to Figure 20-3. Which of the following statements is INCORRECT?
95. The correct order for the four steps that must be followed to solve problems graphically is
96. A linear programming problem has an objective function of 12X + 14Y. If the optimal solution provided by
the model is to produce and sell 500 units of X and 1,250 units of Y, the expected return is
97. A linear programming model would NOT include which of the following items?