Chapter 18: Inventory and Production Management IM 17
where EPR = economic production run quantity
Q = estimated annual quantity produced in units
S = estimated cost of setting up a production run
production run quantities.
d. The critical element in using either an EOQ or EPR model is to properly identify costs,
especially carrying costs.
variable costs.
e. The EOQ model does not provide any direction for managers attempting to control all of the
separate costs that collectively compose ordering and carrying costs since the model treats
the two costs as trade-offs.
L. Order Point of Safety Stock
1. General
a. The order point is the level of inventory that triggers the placement of an order for additional
as:
point formula is:
i. A safety stock of inventory is carried to act as a buffer to protect the company against the
possibility of stock outs.
both usage and lead time.
2. Pareto Inventory Analysis
Chapter 18: Inventory and Production Management IM 18
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a. Pareto inventory analysis is a process of separating inventory items into three groups
based on annual cost-to-volume usage; items that are of the highest value are referred to as
b. Management can determine the best inventory control method for each item once inventory is
categorized as A, B, or C. For example, A-type inventory may require a perpetual inventory
c. A two-bin system is an inventory ordering system in which two containers (or stacks) of raw
d. A red-line system is an inventory ordering system in which a red line is painted on the
inventory container at a point deemed to be the reorder point.
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Multiple Choice Questions
1. (LO.1) Every company has upstream suppliers and downstream customers. These relationships
may be referred to as a
2. (LO.2) Which of the following items is not included in annual inventory carrying costs?
a. Inventory storage cost
3. (LO.3) The approach to producing inventory in which production is conducted in anticipation of
customer orders is referred to as a
a. just in time system.
4. (LO.3) The primary objective of a pull system of production is to minimize:
a. the purchase cost of inventory.
5. (LO.4) Which of the following is not a stage of development in a product’s life cycle?
a. Maturity
6. (LO.4) In which stage of the product life cycle are costs usually at their lowest level and profits at
their highest levels?
a. Maturity
7. (LO.5) Select the correct equation for a product’s target cost (TC).
d. TC = Estimated selling price + (Acceptable profit margin – Selling and administrative costs)
8. (LO.6) Which of the following is a primary goal of just–in-time systems?
c. Continuously improving production/performance efficiency
d. All of the above
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9. (LO.6) What is the optimal JIT situation with regard to supplier relationships?
a. Have only one vendor for any given item
d. None of the above
10. (LO.7) A production system involving a network of robots and material conveyance devices
a. flexible manufacturing system.
11. (LO.8) Select the incorrect statement concerning lean enterprises.
those items without waste.
b. Like JIT, one of the primary goals of lean manufacturing is to eliminate value-added activities.
12. (LO.9) Points at which the processing levels are sufficiently slow to produce idle time in other
a. stress points.
b. bottlenecks.
13. (LO.10 Appendix) The annual demand for mantle clocks is estimated to be 5,000 units. The
annual cost of carrying one unit in inventory is $10, and the cost to initiate a production run is
mantle clock is:
a. $10,250.
14. (LO.10 Appendix) B Company needs help in determining the number of production runs it should
a. 7
b. 5
c. 4
d. 2
15. (LO.10 Appendix) When the level of safety stock is increased:
a. lead time will increase.
b. carrying costs will decrease.
d. lead time will decrease.
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Multiple Choice Solutions
1. c
2. b
3. b
12. b
13. b (CMA Adapted)
Annual demand 5,000 units
Runs for the year ÷ 4
14. b (CMA Adapted)
1,000
1,000,000
$10
$1,000 5,000 2
EPR
Annual demand 5,000 units
Economic production run ÷ 1,000 units
Runs per year 5
15. c (CMA Adapted)