Quantitative Analysis for Management, 11e (Render)
Chapter 6 Inventory Control Models
1) Inventory is such an expensive asset that it may account for as much as 50 percent of a firm’s invested capital.
2) The same ratio of marginal loss to the sum of marginal loss and marginal profit is used to solve one–period
inventory models for both discrete and continuous probability distributions.
3) In the decoupling function, some inventory may be stored between each production process to act as a buffer.
4) Service level is the chance, measured in percent, that there will be a stockout.
5) A stockout is a situation that occurs when there is no inventory on hand.
6) The concept of inventory is applicable to both manufacturing and service organizations.
7) One reason inventory is required is the uneven flow of resources through a company.
8) Inventory is any stored resource that is used to satisfy a current or future need.
9) Economic order quantity (EOQ) analysis has recently become practical as a consequence of high–speed
computers.
10) Inventory is the common thread that ties all the functions and departments of the organization together.
11) The purpose of the EOQ model is to achieve a balance between the cost of holding inventory and the cost of
stockouts.
12) Under the assumptions made to develop the EOQ model, average inventory is one–half of the maximum
inventory.
13) The EOQ model is relatively insensitive to minor violations of the basic assumptions.
14) The production run model is useful when a firm purchases inventory that is delivered over a period of time.
15) The two fundamental decisions that you have to make when controlling inventory are: (1) how much to order,
and (2) how much money to spend.
16) The economic order quantity helps one estimate the optimal number of units to purchase with each order.
17) The reorder point occurs during a stockout.
18) Safety stock is ignored when computing the reorder point.
19) In a quantity discount model, the purchase cost or material cost must be included in the total cost calculation.
20) Theft is one of the “ordering cost factors.”
21) Purchasing department supplies comprise one of the “carrying cost factors.”
22) We can usually determine an appropriate safety stock even if we are unable to accurately assess the actual
cost of a stockout.
23) One of the assumptions of the basic EOQ model is that the receipt of inventory is instantaneous.
24) ABC analysis places inventory into 26 categories for computer analysis.
25) In ABC inventory analysis, items in the “A” group should have the lowest dollar value to the firm.
26) The costs involved in a typical inventory model are order costs, management costs, and holding costs.
27) ERP systems are expensive to buy and costly to customize.
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Topic: ENTERPRISE RESOURCE PLANNING
28) Inventory
A) is any stored resource used to satisfy current or future need.
B) includes raw materials, work–in–process, and finished goods.
C) levels for finished goods are a direct function of demand.
D) needs from raw materials through finished goods can be reasonably determined, once finished goods demand
is determined.
E) All of the above
29) Which of the following is not a use of inventory?
A) the decoupling function
B) quantity discounts
C) irregular supply and demand
D) the translucent function
E) to avoid stockouts and shortages
30) In making inventory decisions, the purpose of the basic EOQ model is to
A) minimize carrying costs.
B) minimize ordering costs.
C) minimize the sum of carrying costs and ordering costs.
D) minimize customer dissatisfaction.
E) minimize stock on hand.
31) Which of the following is not considered a significant inventory cost?
A) cost of production labor
B) purchase cost
C) cost of stockouts
D) cost of carrying an item
E) cost of ordering
32) Which of the following is part of the determination of EOQ?
A) cost of production labor
B) cost of stockouts
C) purchase cost
D) annual demand
E) total revenue
33) Which of the following factors is (are) not included in ordering cost?
A) bill paying
B) obsolescence
C) purchasing department overhead costs
D) inspecting incoming inventory
E) developing and sending purchase orders
34) Which of the following factors is (are) not included in carrying cost?
A) spoilage
B) obsolescence
C) cost of capital
D) inspecting incoming inventory
E) warehousing overhead costs
35) Mark Achin sells 3,600 electric motors each year. The cost of these is $200 each, and demand is constant
throughout the year. The cost of placing an order is $40, while the holding cost is $20 per unit per year. There are
360 working days per year and the lead–time is 5 days. If Mark orders 200 units each time he places an order,
what would his total ordering cost be for the year?
A) $2,000
B) $2,720
C) $200
D) $720
E) None of the above
36) The annual demand for a product has been projected at 2,000 units. This demand is assumed to be constant
throughout the year. The ordering cost is $20 per order, and the holding cost is 20 percent of the purchase cost.
The purchase cost is $40 per unit. There are 250 working days per year. Currently, the company is ordering 500
units each time an order is placed. Assuming the company uses a safety stock of 20 units resulting in a reorder
point of 60 units, what is the expected lead–time for delivery?
A) 4 days
B) 5 days
C) 6 days
D) 7 days
E) None of the above
37) The objective of a(n) ________ system is to reduce costs by integrating all of the operations of a firm.
A) MRP
B) ERP
C) JIT
D) VMI
E) EOQ
38) As the service level increases,
A) carrying cost increases at an increasing rate.
B) carrying cost increases at a decreasing rate.
C) carrying cost decreases at a decreasing rate.
D) carrying cost decreases at an increasing rate.
E) None of the above
39) R. C. Barker makes purchasing decisions for his company. One product that he buys costs $50 per unit when
the order quantity is less than 500. When the quantity ordered is 500 or more, the price per unit drops to $48. The
ordering cost is $30 per order and the annual demand is 7,500 units. The holding cost is 10 percent of the
purchase cost. If R. C. orders 500 units each time he places an order, what would the total annual holding cost
be?
A) $450
B) $1,200
C) $1,250
D) $2,400
E) None of the above
40) Which of the following is not an assumption for the basic EOQ model?
A) Only an integer number of orders can be made each year.
B) Quantity discounts are not possible.
C) Inventory receipt is instantaneous (all at once).
D) With orders placed at the correct time, there will be no shortages.
E) Demand is known.
41) For the basic EOQ model, which of the following relationships is not true?
A) The optimal number of orders per year equals annual demand divided by the EOQ.
B) The reorder point equals daily demand multiplied by the lead–time in days, excluding safety stock.
C) Average inventory level equals one–half the order size.
D) The average dollar level of inventory equals unit price multiplied by order quantity.
E) At EOQ, annual ordering cost equals annual carrying cost.
42) The EOQ model without the instantaneous receipt assumption is commonly called the
A) quantity discount model.
B) safety stock model.
C) planned shortage model.
D) production run model.
E) None of the above
43) Which of the following is not a potential drawback of an ERP system?
A) Training employees on the use of the new software can be expensive.
B) The software is costly to customize.
C) The software is expensive to buy.
D) The implementation may require a company to change its normal operations.
E) It does not incorporate inventory control decisions.
44) Sensitivity analysis of EOQ refers to
A) the attitude of top management toward the use of the EOQ model.
B) analysis of how much the EOQ will change if different input values are used.
C) an assessment of the impact of obsolescence upon the EOQ.
D) a study of the impact of storing incompatible products in the same warehouse.
E) analysis of the impact of stock shortages on customers or on production.
45) Which of the following is not a benefit of a well–developed ERP system?
A) It is relatively inexpensive to customize.
B) It can integrate all of the operations of a firm.
C) It can reduce transaction costs.
D) It can increase speed of information.
E) It can increase accuracy of information.
46) The annual demand for a product has been projected at 2,000 units. This demand is assumed to be constant
throughout the year. The ordering cost is $20 per order, and the holding cost is 20 percent of the purchase cost.
Currently, the purchase cost is $40 per unit. There are 250 working days per year. Whenever an order is placed, it
is known that the entire order will arrive on a truck in 6 days. Currently, the company is ordering 500 units each
time an order is placed. What is the total holding cost for the year using this policy?
A) $400
B) $2,000
C) $4,000
D) $8,000
E) None of the above
47) Mark Achin sells 3,600 electric motors each year. The cost of these is $200 each, and demand is constant
throughout the year. The cost of placing an order is $40, while the holding cost is $20 per unit per year. There are
360 working days per year and the lead–time is 5 days. If Mark orders 200 units each time he places an order,
what would his average inventory be (in units)?
A) 100
B) 200
C) 60
D) 120
E) None of the above
48) Andre Candess manages an office supply store. One product in the store is computer paper. Andre knows
that 10,000 boxes will be sold this year at a constant rate throughout the year. There are 250 working days per
year and the lead–time is 3 days. The cost of placing an order is $30, while the holding cost is $15 per box per
year. How many units should Andre order each time?
A) 200
B) 400
C) 500
D) 100
E) None of the above
49) Daniel Trumpe has computed the EOQ for a product he sells to be 400 units. However, due to recent events
he has a cash flow problem. Therefore, he orders only 100 units each time he places an order. Which of the
following is true for this situation?
A) Annual ordering cost will be lower than annual holding cost.
B) Annual ordering cost will be higher than annual holding cost.
C) Annual ordering cost will equal annual holding cost.
D) Annual ordering cost will be unaffected by the order policy change.
E) Nothing can be determined without more information.
50) With ________, inventory arrives just before it is needed.
A) VMI
B) ABC
C) ERP
D) JIT
E) JBT
51) In a JIT system, inventory managers can uncover bottlenecks by introducing or removing which of the
following?
A) C–kanbans
B) P–kanbans
C) E–kanbans
D) T–kanbans
E) I–kanbans
52) Which of the following does not have an impact on EOQ?
A) safety stock
B) demand per unit time
C) order cost
D) holding cost
E) None of the above
53) The demand during the lead–time is normally distributed with a mean of 40 and a standard deviation of 4. If
they have calculated a reorder point of 46.60 units, what service level are they assuming?
A) 85 percent
B) 90 percent
C) 95 percent
D) 97.5 percent
E) None of the above
54) Judith Thompson is the manager of the student center cafeteria. She is introducing pizza as a menu item. The
pizza is ordered frozen from a local pizza establishment and baked at the cafeteria. Judith anticipates a weekly
demand of 10 pizzas. The cafeteria is open 45 weeks a year, 5 days a week. The ordering cost is $15 and the
holding cost is $0.40 per pizza per year. What is the optimal number of pizzas Judith should order?
A) 184 pizzas
B) 9 pizzas
C) 5 pizzas
D) 28 pizzas
E) None of the above
55) What shows how many units are needed at every level of production?
A) production level tree
B) material requirements tree
C) decision tree
D) material structure tree
E) Christmas tree
56) R. C. Barker makes purchasing decisions for his company. One product that he buys costs $50 per unit when
the order quantity is less than 500. When the quantity ordered is 500 or more, the price per unit drops to $48. The
ordering cost is $30 per order and the annual demand is 7,500 units. The holding cost is 10 percent of the
purchase cost. If R. C. wishes to minimize his total annual inventory costs, he must evaluate the total cost for two
possible order quantities. What are these two possible quantities? (Round answer to nearest unit.)
A) 300 and 306
B) 300 and 500
C) 306 and 50
D) 200 and 306
E) None of the above
57) The annual demand for a product is 1,000 units. The company orders 200 units each time an order is placed.
The lead–time is 6 days, and the company has determined that 20 units should be held as a safety stock. There are
250 working days per year. What is the reorder point?
A) 20
B) 24
C) 44
D) 120
E) None of the above
58) The annual demand for a product has been projected at 2,000 units. This demand is assumed to be constant
throughout the year. The ordering cost is $20 per order, and the holding cost is 20 percent of the purchase cost.
Currently, the purchase cost is $40 per unit. There are 250 working days per year. Whenever an order is placed,
it is known that the entire order will arrive on a truck in 6 days. Currently, the company is ordering 500 units
each time an order is placed. What should be the reorder point (excluding any safety stock) under the current
policy?
A) 48
B) 100
C) 6
D) 24
E) None of the above
59) Andre Candess manages an office supply store. One product in the store is computer paper. Andre knows
that 10,000 boxes will be sold this year at a constant rate throughout the year. There are 250 working days per
year and the lead–time is 3 days. The cost of placing an order is $30, while the holding cost is $15 per box per
year. If Andre orders 500 boxes each time he orders from his supplier, what would his total annual inventory cost
be (holding cost plus ordering cost)?
A) $3,000
B) $4,350
C) $3,075
D) $3,750
E) None of the above
60) Rolf Steps is the production manager for a local manufacturing firm. This company produces staplers and
other items. The holding cost is $2 per unit per year. The cost of setting up the production line for this is $25.
There are 200 working days per year. The production rate for this product is 80 per day. If the production order
quantity is 200 units, what was the daily demand (rounded to the nearest whole unit)?
A) 6 units
B) 7 units
C) 8 units
D) 9 units
E) None of the above
61) The “point at which to reorder” depends directly on which of the following?
A) EOQ
B) ordering cost
C) lead–time
D) storage costs
E) unit purchasing cost
62) Judith Thompson, the manager of the student center cafeteria, has added pizza to the menu. The pizza is
ordered frozen from a local pizza establishment and baked at the cafeteria. Judith anticipates a weekly demand
of 10 pizzas. The cafeteria is open 45 weeks a year, 5 days a week. The ordering cost if $15 and the holding cost is
$0.40 per pizza per year. The pizza vendor has a 4–day lead–time and Judith wants to maintain 1 pizza for safety
stock. What is the optimal reorder point?
A) 10
B) 8
C) 4
D) 9
E) None of the above
63) R. C. Barker makes purchasing decisions for his company. One product that he buys costs $50 per unit when
the order quantity is less than 500. When the quantity ordered is 500 or more, the price per unit drops to $48. The
ordering cost is $30 per order and the annual demand is 7,500 units. The holding cost is 10 percent of the
purchase cost. How many units should R. C. order to minimize his total annual inventory cost? (Round your
answer to the nearest unit.)
A) 300
B) 306
C) 500
D) 200
E) None of the above
64) The annual demand for a product has been projected at 2,000 units. This demand is assumed to be constant
throughout the year. The ordering cost is $20 per order, and the holding cost is 20 percent of the purchase cost.
Currently, the purchase cost is $40 per unit. There are 250 working days per year. Whenever an order is placed,
it is known that the entire order will arrive on a truck in 6 days. How many units should the company order each
time an order is placed if the company wishes to minimize total inventory cost?
A) 100
B) 200
C) 250
D) 500
E) None of the above