Deck 12: Inventory Management

Question 1

Cycle counting is an inventory control technique exclusively used for cyclical items.

Answer 1

False

Question 2

Retail inventory that is unaccounted for between receipt and time of sale is known as shrinkage.

Answer 2

True

Question 3

In the production order quantity (POQ) model, inventory does not arrive in a single moment but flows in at a steady rate, resulting in a larger lot size than in an otherwise identical EOQ problem.

Answer 3

True

Question 4

In cycle counting, the frequency of item counting and stock verification usually varies from item to item depending upon the item's classification.

Question 5

A major challenge in inventory management is to maintain a balance between inventory investment and customer service.

Question 6

ABC analysis classifies inventoried items into three groups, usually based on annual units or quantities used.

Question 7

The demand for automobiles would be considered an independent demand.

Question 8

If setup costs are reduced by substantial reductions in setup time, the production order quantity is also reduced.

Question 9

The EOQ model is best suited for items whose demand is dependent on other products.

Question 10

Insurance and taxes on inventory are part of the costs known as setup or ordering costs.

Question 11

One function of inventory is to take advantage of quantity discounts.

Question 12

In the simple EOQ model, if annual demand were to increase, the EOQ would increase proportionately.

Question 13

According to the global company profile, Amazon.com's advantage in inventory management comes from its almost fanatical use of economic order quantity and safety stock calculations.

Question 14

Which item to order and with which supplier the order should be placed are the two fundamental issues in inventory management.

Question 15

In ABC analysis, "A" Items are the most tightly controlled.

Question 16

One advantage of cycle counting is that it maintains accurate inventory records.

Question 17

ABC analysis is based on the presumption that carefully controlling all items is necessary to produce important inventory savings.

Question 18

Work-in-process inventory is devoted to maintenance, repair, and operations.

Question 19

At the economic order quantity, holding costs are equal to product costs.

Question 20

In the simple EOQ model, if the carrying cost were to double, the EOQ would also double.

Question 21

Units of safety stock are additions to the reorder point that allow for variability in the rate of demand, the length of lead time, or both.

Question 22

Which of the following is an element of inventory holding costs?

A) housing costs
B) material handling costs
C) investment costs
D) pilferage, scrap, and obsolescence
E) All of the above are elements of inventory holding cost.

Question 23

The reorder point is the inventory level at which action is taken to replenish the stocked item.

Question 24

All of the following statements about ABC analysis are true except

A) inventory may be categorized by measures other than dollar volume
B) it categorizes on-hand inventory into three groups based on annual dollar volume
C) it is an application of the Pareto principle
D) it states that all items require the same degree of control
E) it states that there are the critical few and the trivial many inventory items

Question 25

In the quantity discount model, the cost of acquiring goods (product cost) is not a factor in determining lot size.

Question 26

Which of the following statements regarding Amazon.com is false?

A) The company was opened by Jeff Bezos in 1995.
B) The company was founded as, and still is, a "virtual retailer" with no inventory.
C) The company is now a world-class leader in warehouse management and automation.
D) The company uses both United Parcel Service and the U.S. Postal Service as shippers.
E) Amazon obtains its competitive advantage through inventory management.

Question 27

Which of the following statements regarding control of service inventories is true?

A) Service inventory is a fictional concept, because services are intangible.
B) Service inventory needs no safety stock, because there's no such thing as a service stockout.
C) Effective control of all goods leaving the facility is one applicable technique.
D) Service inventory has carrying costs but no setup costs.
E) Good personnel selection, training, and discipline are easy.

Question 28

ABC analysis is based upon the principle that

A) all items in inventory must be monitored very closely
B) there are usually a few critical items, and many items which are less critical
C) an item is critical if its usage is high
D) more time should be spent on class "C" items because there are more of them
E) as with grade distributions in many MBA courses, there should be more medium-level "B" items than either "A" or "C" items

Question 29

Which of the following statements about ABC analysis is false?

A) ABC analysis is based on the presumption that controlling the few most important items produces the vast majority of inventory savings.
B) In ABC analysis, "A" Items are tightly controlled, have accurate records, and receive regular review by major decision makers.
C) In ABC analysis, "C" Items have minimal records, periodic review, and simple controls.
D) ABC analysis is based on the presumption that all items must be tightly controlled to produce important cost savings.
E) All of the above statements are true.

Question 30

The two most basic inventory questions answered by the typical inventory model are

A) timing and cost of orders
B) quantity and cost of orders
C) timing and quantity of orders
D) order quantity and service level
E) ordering cost and carrying cost

Question 31

Which of the following would not generally be a motive for a firm to hold inventories?

A) to decouple or separate parts of the production process
B) to provide a stock of goods that will provide a selection for customers
C) to take advantage of quantity discounts
D) to minimize holding costs
E) All of the above are functions of inventory.

Question 32

Among the advantages of cycle counting is that it

A) makes the annual physical inventory more acceptable to management
B) does not require the detailed records necessary when annual physical inventory is used
C) does not require highly trained people
D) allows more rapid identification of errors and consequent remedial action than is possible with annual physical inventory
E) does not need to be performed for less expensive items

Question 33

The fixed-period inventory model can have a stockout during the review period as well as during the reorder period, which is why fixed-period models require more safety stock than fixed-quantity models.

Question 34

In the quantity discount model, it is possible to have a cost-minimizing solution where annual ordering costs do not equal annual carrying costs.

Question 35

Which of the following is not one of the four main types of inventory?

A) raw material inventory
B) work-in-process inventory
C) maintenance/repair/operating supply inventory
D) safety stock inventory
E) All of these are main types of inventory.

Question 36

Service level is the complement of the probability of a stockout.

Question 37

Which of the following is a function of inventory?

A) to decouple or separate parts of the production process
B) to decouple the firm from fluctuations in demand and provide a stock of goods that will provide a selection for customers
C) to take advantage of quantity discounts
D) to hedge against inflation
E) All of the above are functions of inventory.

Question 38

Cycle counting

A) is a process by which inventory records are verified once a year
B) provides a measure of inventory accuracy
C) provides a measure of inventory turnover
D) assumes that all inventory records must be verified with the same frequency
E) assumes that the most frequently used items must be counted more frequently

Question 39

ABC analysis divides on-hand inventory into three classes, generally based upon

A) item quality
B) unit price
C) the number of units on hand
D) annual demand
E) annual dollar volume

Question 40

Safety stock in inventory systems depends only on the average demand during the lead time.

Question 41

A product has demand of 4000 units per year. Ordering cost is $20 and holding cost is $4 per unit per year. The EOQ model is appropriate. The cost-minimizing solution for this product will cost __________ per year in total annual inventory costs.

A) $400
B) $800
C) $1200
D) Zero; this is a class C item.
E) Cannot be determined because unit price is not known.

Question 42

A product has demand of 4000 units per year. Ordering cost is $20 and holding cost is $4 per unit per year. The cost-minimizing solution for this product is to order

A) all 4000 units at one time
B) 200 units per order
C) every 20 days
D) 10 times per year
E) none of the above

Question 43

Which of the following statements about the basic EOQ model is false?

A) If the setup cost were to decrease, the EOQ would fall.
B) If annual demand were to double, the number of orders per year would increase.
C) If the ordering cost were to increase, the EOQ would rise.
D) If annual demand were to double, the EOQ would also double.
E) All of the above statements are true.

Question 44

A product whose EOQ is 40 experiences a decrease in ordering cost from $90 per order to $10. The revised EOQ is

A) three times as large
B) one-third as large
C) nine times as large
D) one-ninth as large
E) cannot be determined

Question 45

Which of the following statements regarding the production order quantity model is true?

A) It applies only to items produced in the firm's own production departments.
B) It relaxes the assumption that all the order quantity is received at one time.
C) It relaxes the assumption that the demand rate is constant.
D) It minimizes the total production costs.
E) It minimizes inventory.

Question 46

If the actual order quantity is the economic order quantity in a problem that meets the assumptions of the economic order quantity model shown below, the average amount of inventory on hand Q* =

A) is smaller than the holding cost per unit
B) is zero
C) is one-half of the economic order quantity
D) is affected by the amount of product cost
E) goes down if the holding cost per unit goes down

Question 47

In the basic EOQ model, if D=6000 per year, S=$100, H=$5 per unit per month, the economic order quantity is approximately

A) 24
B) 100
C) 141
D) 490
E) 600

Question 48

Which of these statements about the production order quantity model is false?

A) The production order quantity model is appropriate when the assumptions of the basic EOQ model are met, except that receipt is noninstantaneous.
B) Because receipt is noninstantaneous, some units are used immediately, not stored in inventory.
C) Average inventory is less than one-half of the production order quantity.
D) All else equal, the smaller the ratio of demand rate to production rate, the larger is the production order quantity.
E) None of the above is false.

Question 49

Which of the following statements about the basic EOQ model is true?

A) If the ordering cost were to double, the EOQ would rise.
B) If annual demand were to double, the EOQ would increase.
C) If the carrying cost were to increase, the EOQ would fall.
D) If annual demand were to double, the number of orders per year would increase.
E) All of the above statements are true.

Question 50

A product whose EOQ is 400 experiences a 50% increase in demand. The new EOQ is

A) unchanged
B) increased by less than 50%
C) increased by 50%
D) increased by more than 50%
E) cannot be determined

Question 51

Which of the following is not an assumption of the economic order quantity model shown below? Q* =

A) Demand is known, constant, and independent.
B) Lead time is known and constant.
C) Quantity discounts are not possible.
D) Production and use can occur simultaneously.
E) The only variable costs are setup cost and holding (or carrying) cost.

Question 52

The EOQ model with quantity discounts attempts to determine

A) what is the lowest amount of inventory necessary to satisfy a certain service level
B) what is the lowest purchasing price
C) whether to use fixed-quantity or fixed-period order policy
D) how many units should be ordered
E) what is the shortest lead time

Question 53

For a certain item, the cost-minimizing order quantity obtained with the basic EOQ model was 200 units and the total annual inventory (carrying and setup) cost was $600. The inventory carrying cost per unit per year for this item is

A) $1.50
B) $2.00
C) $3.00
D) $150.00
E) not enough data to determine

Question 54

In the basic EOQ model, if the cost of placing an order doubles, and all other values remain constant, the EOQ will

A) increase by about 41%
B) increase by 100%
C) increase by 200%
D) increase, but more data is needed to say by how much
E) either increase or decrease

Question 55

The primary purpose of the basic economic order quantity model shown below is Q* =

A) to calculate the reorder point, so that replenishments take place at the proper time
B) to minimize the sum of carrying cost and holding cost
C) to maximize the customer service level
D) to minimize the sum of setup cost and holding cost
E) to calculate the optimum safety stock

Question 56

Most inventory models attempt to minimize

A) the likelihood of a stockout
B) the number of items ordered
C) total inventory based costs
D) the number of orders placed
E) the safety stock

Question 57

Which of the following statements regarding the reorder point is true?

A) The reorder point is that quantity that triggers an action to restock an item.
B) There is a reorder point even if lead time and demand during lead time are constant.
C) The reorder point is larger than d x L if safety stock is present.
D) The fixed-period model has no reorder point.
E) All of the above are true.

Question 58

A certain type of computer costs $1,000, and the annual holding cost is 25%. Annual demand is 10,000 units, and the order cost is $150 per order. What is the approximate economic order quantity?

A) 16
B) 70
C) 110
D) 183
E) 600

Question 59

The assumptions of the production order quantity model are met in a situation where annual demand is 3650 units, setup cost is $50, holding cost is $12 per unit per year, the daily demand rate is 10 and the daily production rate is 100. The production order quantity for this problem is approximately

A) 139
B) 174
C) 184
D) 365
E) 548

Question 60

An inventory decision rule states "when the inventory level goes down to 14 gearboxes, 100 gearboxes will be ordered." Which of the following statements is true?

A) One hundred is the reorder point, and 14 is the order quantity.
B) Fourteen is the reorder point, and 100 is the order quantity.
C) The number 100 is a function of demand during lead time.
D) Fourteen is the safety stock, and 100 is the reorder point.
E) None of the above is true.

Question 61

If daily demand is constant at 10 units per day, and lead time averages 12 days with a standard deviation of 3 days, 95 percent service requires a safety stock of approximately

A) 28 units
B) 30 units
C) 49 units
D) 59 units
E) 114 units

Question 62

The purpose of safety stock is to

A) replace failed units with good ones
B) eliminate the possibility of a stockout
C) eliminate the likelihood of a stockout due to erroneous inventory tally
D) control the likelihood of a stockout due to the variability of demand during lead time
E) protect the firm from a sudden decrease in demand

Question 63

When quantity discounts are allowed, the cost-minimizing order quantity

A) is always an EOQ quantity
B) minimizes the sum of holding and ordering costs
C) minimizes the unit purchase price
D) may be a quantity below that at which one qualifies for that price
E) minimizes the sum of holding, ordering, and product costs

Question 64

If the standard deviation of demand is six per week, demand is 50 per week, and the desired service level is 95%, approximately what is the statistical safety stock?

A) 8 units
B) 10 units
C) 16 units
D) 64 units
E) Cannot be determined without lead time data.

Question 65

A specific product has demand during lead time of 100 units, with a standard deviation of 25 units. What safety stock (approximately) provides a 95% service level?

A) 41
B) 55
C) 133
D) 140
E) 165

Question 66

A production order quantity problem has daily demand rate = 10 and daily production rate = 50. The production order quantity for this problem is approximately 612 units. The average inventory for this problem is approximately

A) 61
B) 245
C) 300
D) 306
E) 490

Question 67

A local club is selling Christmas trees and deciding how many to stock for the month of December. If demand is normally distributed with a mean of 100 and standard deviation of 20, trees have no salvage value at the end of the month, trees cost $20, and trees sell for $50 what is the service level?

A) .60
B) .20
C) .84
D) .40
E) unable to determine given the above information

Question 68

If daily demand is normally distributed with a mean of 15 and standard deviation of 5, and lead time is constant at 4 days, 90 percent service level will require safety stock of approximately

A) 7 units
B) 10 units
C) 13 units
D) 16 units
E) 26 units

Question 69

Service level is

A) the chance of stocking out
B) the chance of not stocking out
C) something that should be minimized in retail
D) calculated as the cost of a shortage divided by (the cost of overage + the cost of shortage) for single- period models
E) B and D

Question 70

The fixed-period inventory model requires more safety stock than the fixed-quantity models because

A) a stockout can occur during the review period as well as during the lead time
B) this model is used for products that have large standard deviations of demand
C) this model is used for products that require very high service levels
D) replenishment is not instantaneous
E) setup costs and holding costs are large

Question 71

Demand for dishwasher water pumps is 8 per day. The standard deviation of demand is 3 per day, and the order lead time is four days. The service level is 95%. What should the reorder point be?

A) about 18
B) about 24
C) about 32
D) about 38
E) more than 40

Question 72

Which of the following items is mostly likely managed using a single-period order model?

A) Christmas trees
B) canned food at the grocery store
C) automobiles at a dealership
D) metal for a manufacturing process
E) gas sold to a gas station

Question 73

Which of the following statements about quantity discounts is false?

A) The cost-minimizing solution may or may not be where annual holding costs equal annual ordering costs.
B) In inventory management, item cost becomes relevant to inventory decisions only when a quantity discount is available.
C) If carrying costs are expressed as a percentage of value, EOQ is larger at each lower price in the discount schedule.
D) The larger annual demand, the less attractive a discount schedule will be.
E) The smaller the ordering cost, the less attractive a discount schedule will be.

Question 74

The proper quantity of safety stock is typically determined by

A) using a single-period model
B) carrying sufficient safety stock so as to eliminate all stockouts
C) multiplying the EOQ by the desired service level
D) setting the level of safety stock so that a given stockout risk is not exceeded
E) minimizing total costs

Question 75

The main trait of a single-period model is that

A) inventory has limited value after a certain period of time
B) it has the largest EOQ sizes
C) the order quantity should usually equal the expected value of demand
D) supply is limited
E) all of the above

Question 76

In a safety stock problem where both demand and lead time are variable, demand averages 150 units per day with a daily standard deviation of 16, and lead time averages 5 days with a standard deviation of 1 day. The standard deviation of demand during lead time is approximately

A) 15 units
B) 100 units
C) 154 units
D) 500 units
E) 13,125 units

Question 77

If demand is not uniform and constant, then stockout risks can be controlled by

A) increasing the EOQ
B) placing an extra order
C) raising the selling price to reduce demand
D) adding safety stock
E) reducing the reorder point

Question 78

Suppose that a newspaper stand is operating under the following conditions; papers cost $.4, have no salvage value, and sell for $.80. If the salvage value is increased by $.1, what is the increase in service level?

A) .5
B) 0
C) .07
D) 1
E) unable to determine given only the above information

Question 79

Which category of inventory holding costs is much higher than average for rapid-change industries such as PCs and cell phones?

A) housing costs
B) material handling costs
C) labor cost
D) parts cost
E) pilferage, scrap, and obsolescence

Question 80

A bakery wants to determine how many trays of doughnuts it should prepare each day. Demand is normal with a mean of 5 trays and standard deviation of 1 tray. If the owner wants a service level of at least 95% how many trays should he prepare (round to the nearest whole tray)? Assume doughnuts have no salvage value after the day is complete.

A) 5
B) 4
C) 6
D) 7
E) unable to determine with the above information