CHAPTER 12
INVENTORY CONTROL MODELS
SOLUTIONS TO DISCUSSION QUESTIONS
12-1. Inventory is an important consideration for managers because as much as 50% of the total assets of
a company can be tied up in inventory. Because of this large investment in inventory, controlling
12-2. The purpose of inventory control is to regulate the flow of inventory at the various inventory storage
12-3. Storing large quantities of inventory can eliminate shortages and stockouts. On the other hand,
storing large quantities of inventory can significantly increase the cost of carrying or holding inventory.
12-4. Although there can be many factors to be considered in inventory control, there are basically two
12-5. There are a number of assumptions that are made in using the economic order quantity. It is
assumed that the cost of the items, the cost of ordering, the cost of holding inventory, and the annual
12-6. The major costs in determining the economic order quantity include (1) the cost of the items, (2) the
12-7. The reorder point specifies when an order is to be placed for new inventory items. When the
inventory drops to or below the reorder point, an order is placed. The reorder point for the basic economic
12-8. The purpose of sensitivity analysis is to determine what effect changes in the annual demand, the
12-9. The assumptions made in the EPQ model are the same assumptions made in the economic order
quantity with the exception that the instantaneous receipt of inventory assumption is eliminated. Thus, the
12-10. When the daily production rate becomes very large, the EPQ model becomes identical to the
12-11. In the quantity discount model, the carrying cost is a percentage of the unit cost. This is due to the
12-12. Solving a quantity discount model involves several steps. The first step is to compute the
economic order quantity for each discount range. The second step is to adjust the order quantity
12-13. When the stockout cost is known, the safety stock can be determined by comparing the total cost
of each safety stock policy. This method requires that we know the probability of demand over lead time
12-14. ABC analysis is the process of categorizing inventory into three groups. The A group is very
important to the organization and requires strict monitoring and control. The B group is not as important