Deck 8: Inventory Models

Question 1

In the planned shortage model, you cannot recommend a maximum inventory position of zero.

Answer 1

False

Question 2

In the single period inventory model, the optimal service level is the proportion of total customer demand that will be satisfied in any given period.

Answer 2

False

Question 3

Excess inventory should be avoided if at all possible, since it must be either sold at a discount, sold for salvage, or dumped.

Answer 3

False

Question 4

In the economic order quantity (EOQ) model, if the holding cost and the ordering cost both double, the value of Q* will:

A)decrease by 50%.
B)remain unchanged.
C)double.
D)quadruple.

Question 5

Insufficient inventory should be avoided if at all possible since it can result in lost business.

Question 6

An inventory policy has two components: the order quantity and the reorder point.

Question 7

The strongest factor influencing the choice of inventory model is the:

A)pattern of demand.
B)value of the inventoried item.
C)presence or absence of quantity discounts.
D)presence or absence of safety stocks.

Question 8

Quantity discounts reduce the unit price.Inventory costs are always reduced by opting for a quantity discount.

Question 9

Economic order quantity for production is optimal for a single product.The solution for several products sharing a production line requires computing an economic order quantity for each product.

Question 10

The closer the unit salvage value is to the per unit item cost, the higher the optimal order quantity will be when using the single period inventory model.

Question 11

Actual demand may exceed recorded sales.

Question 12

"Shrinkage" of inventory includes:

A)reduced unit value.
B)theft.
C)obsolescence.
D)misplacement.

Question 13

In the calculation of economic order quantity, manufacturing costs for items produced in-house include the costs of setting up the production line.

Question 14

The inventory holding cost is proportional to the order quantity, but the annual ordering cost is inversely proportional to the order quantity.Annual procurement costs do not depend on the order quantity.

Question 15

The economic order quantity model assumes the item has little or no shrinkage.

Question 16

In the ABC classification system, "C" items typically account for:

A)roughly half the annual production value.
B)around half the number of inventory SKU's.
C)approximately one-third of annual inventory usage.
D)the smallest share of the total inventory.

Question 17

Which of the following is not a main category of cost in inventory models?

A)Customer satisfaction.
B)Production/procurement.
C)Quality/inspection.
D)Holding/carrying.

Question 18

Holding costs and procurement/manufacturing costs are both functions of the unit cost of the item.

Question 19

In the continuous review system, order quantity tends to be fixed, and order time is variable.This is reversed in a periodic review system.

Question 20

Inclusion of quantity discounts may influence both the order
quantity and the reorder point.

Question 21

In the single period inventory model, when the goodwill cost increases:

A)the optimal order quantity will decrease.
B)the optimal order quantity will increase.
C)the mean demand will increase.
D)the mean demand will decrease.

Question 22

What are the three typical types of inventory process classifications?

Question 23

In the single period inventory model, the probability distribution for customer demand:

A)must be discrete.
B)is directly derived from sales data.
C)may be continuous.
D)is generally assumed to be uniform.

Question 24

In the production lot size model, the maximum inventory level (M) is lower than in the EOQ model.Why? By how much?

Question 25

In the single period inventory model, if the unit salvage value equals the unit cost of the good, the optimal service level will be:

A)0.
B)50%.
C)100%.
D)unknown.

Question 26

In the basic economic order quantity (EOQ) model, at Q* the estimated total annual holding cost:

A)is less than the estimated total annual ordering cost.
B)equals the estimated total annual ordering cost.
C)is greater then the estimated total annual ordering cost.
D)bears no necessary relationship to estimated total annual ordering cost.

Question 27

In the basic economic order quantity (EOQ) model, if monthly demand is a constant 430 units, the order quantity is 144 (12 dozen), and the firm operates during fifty five-day weeks a year, the cycle time will be approximately:

A)7 working days.
B)7 calendar days.
C)84 working days.
D)cannot be determined with the data provided.

Question 28

Opportunity cost (or shrinkage or obsolescence) is an example of:

A)holding cost.
B)order/setup cost.
C)customer satisfaction cost.
D)procurement/manufacturing cost.

Question 29

A two bin system is an example of a:

A)(R,M) policy.
B)(R,Q) policy.
C)(T,M) policy.
D)(T,R,M) policy.

Question 30

When comparing the safety stock of the cycle service level (SSc) approach with the safety stock level of the unit service level (SSu) approach, other things being equal:

A)SSc > SSu.
B)SSc = SSu.
C)SSc < SSu.
D)no necessary relationship exists.

Question 31

In the single period inventory model, customer demand is always assumed to be:

A)normally distributed.
B)uniformly distributed.
C)of unknown distribution.
D)stochastic.

Question 32

In the single period inventory model:

A)salvage value is always positive.
B)goodwill (shortage) costs are always less than the item cost.
C)goodwill (shortage) costs are always less than the salvage value.
D)salvage value is always less than the selling price.

Question 33

If sales data differs from demand, what constitutes the difference?

Question 34

In the production lot size model:

A)the maximum inventory position, M, equals Q*.
B)additions to, and withdrawals from, inventory occur at equal rates.
C)at Q*, annual production setup costs equal annual holding costs.
D)at Q*, annual production setup costs exceed annual holding costs.

Question 35

By what amount does adding safety stock increase annual inventory costs?

Question 36

In the planned shortage model, a zero value for R, the reorder point, means:

A)reorder only when a customer appears.
B)instantaneous inventory replenishment.
C)reorder when the back-order position is zero.
D)reorder in a quantity equal to the back-order position.

Question 37

If you compare EOQ with the production lot size model, the optimal order quantity and the holding costs differ by the factor

Question 38

When compared with the maximum inventory level of the economic order quantity (EOQ) model, the maximum inventory level of the production lot size model is:

A)smaller.
B)greater.
C)roughly equal.
D)unrelated.

Question 39

For the production lot size model to be appropriate, the relationship between D, annual demand, and P, maximum annual production rate, must be:

A)D > P.
B)D = P.
C)D < P.
D)no necessary relationship exists.

Question 40

In the basic economic order quantity (EOQ) model, a doubling of estimated annual demand would lead to what change in Q*?

A)A doubling.
B)No change.
C)More than a 50% decrease.
D)Less than a 50% increase.

Question 41

Consider a basic economic order quantity (EOQ) model with the following characteristics:
$\begin{array}{ll}\text { Item cost: } & \$ 15 . \\\text { Item selling price: } & \$ 20 .\\\text { Monthly demand: } &500 \text { units (constant) }\\\text { Annual holding cost: } & 9 \% \text { of purchase cost }\\\text { Cost per order: }& \$ 18\\\text { Order lead time: } & 5 \text { days } \\\text { Firm's work year: } & 300 \text { days ( } 50 \text { weeks } @ 6 \text { days per week) } \\\text { Safety stock: } & 15 \% \text { of monthly demand }\end{array}$

For this problem, determine the values of:
A.Q* the optimal order quantity.
B.R, the reorder point.
C.T, the cycle time.
D.M, the maximum quantity in inventory.
E.Total annual inventory cost.
F.Suppose the vendor demands purchases in multiples of 500 only.
What is the increase in total annual inventory cost that this causes?

Question 42

The annual demand for inventory item 67J is 6000 SKU's.Order lead time is 6 workdays, and the firm's "year" is 300 days (6 workdays weekly, times 50 weeks).Empirical analysis indicates that the daily standard deviation of SKU demand is 4 units.If the firm desires only a 5% chance of a stockout, during any inventory cycle:
A.What is the corresponding safety stock level?
B.What is the corresponding reorder point, R?
C.Suppose Q* = 400.Now if the firm is willing to be out of stock of 67J, an average of no more than two inventory cycles per year, what should be the safety stock level?

Question 43

Annual demand = 2000 units.Cost of order = $100
Holding cost = $10
Cost of backorder = $5
Cost of item = $50
Goodwill cost = $10
Should you use a planned shortage model or EOQ?

Question 44

Garner is your sole supplier of gremmels, a key component in the Farfel unit your company produces and sells.Formerly, you ordered from Garner 800 units monthly, to meet an annual need (demand) for 9600 units.Purchase cost was $3.00 per unit.Now, however, Garner is offering discounts of 7% on orders of 1500 or more, and 15% on orders of 3000 units or more.Orders are placed and filled at a cost of $32 per order.Inventory holding cost is estimated at 20% of purchase cost, per item, per year.Under the new discount plan, what is your best strategy?

Question 45

When employing A,B,C inventory classification, would you use EOQ models for type C items? Explain.

Question 46

Your major competitor, Grause's Sofa Factory, just went out of business with a large number of unfilled backorders.Many Grause's customers have lost their deposits.Your sales staff is creating a marketing campaign targeting Grause's customer base.How might you temporarily modify the numbers used in your own planned shortage model?

Question 47

Anderson Supply Company sells windows and French doors.Its most popular French door model is a six foot unit, which it purchases from Marvel doors.The units cost Anderson $500 each and sell for $700 each.Anderson uses a 22% annual holding cost rate and the cost of placing an order with Marvel for the doors is $200.If Anderson runs out of stock of doors it estimates that it incurs a goodwill cost of $15 per unit for each week a customer must wait for the door.The fixed administrative cost to process a backorder isestimated to be $5.Anderson sells an average of 30 units per week and the lead time for delivery of the doors is approximately two weeks.
A.Determine the optimal order quantity and reorder point for the doors.
B.Approximately what percentage of customers will have to wait for their units?

Question 48

In the planned shortage model, what is the difference between annual time-dependent shortage cost and annual time-independent shortage cost?

Question 49

What advantage does an (R,M) model have over an (R,Q) model?

Question 50

Monthly sales of Better House magazine at Smith's Foods follow a normal distribution with a mean of 140 copies and a standard deviation of 15 copies.The magazine sells at Smith's for $1.25 a copy and costs Smith's $.50 per copy.Unsold copies are repurchased by the publisher for $.10 per copy.Smith's management estimates that if it runs out of Better House magazine it suffers a goodwill loss of approximately $.80 for each unsatisfied customer.
A.Determine Smith's optimal order quantity each month for Better House magazine.
B.Determine Smith's expected monthly profit from Better House magazine if it orders optimally.
C.The publisher of Better House magazine is offering Smith's the following option.It will increase its selling price from $.50 to $.55, but will also increase the amount it credits returned
magazines from $.10 to $.25.Should Smith's take this deal? Give your reasons.

Question 51

A distributor of consumer appliances wants to calculate the reorder point for a popular model of microwave oven.It operates 365 days a year, and wishes to maintain a 98% unit service level.OtherAnnual demand: $\quad 300$ units
Lead time: $\quad 5$ days
Standard deviation of demand during lead time: 7 units Order quantity $\left( \mathrm { Q } ^ { * } \right) : 25$
A.What is the reorder point, R?
B.What major assumption underlies the application of this technique?
C.Is the safety stock suggested here different than it would be for a cycle service level of 98%?

Question 52

Below is the published all units discount schedule for cases of Brightall lightbulbs, with breakpoints at 100, 250, and 500. $$\begin{array} { c c } < 100 \text { cases } & \$ 5.00 / \mathrm { case } \\100 - 250 \text { cases } & \$ 4.50 / \mathrm { case } \\251 - 500 \text { cases } & \$ 4.00 / \mathrm { case } \\> 500 \text { cases } & \$ 3.80 / \mathrm { case }\end{array}$$ Obviously, no one would buy 99 cases at a cost of $495 since you can get 110 cases at the same price.What are the real breakpoints?

Question 53

Why is there no (T,Q) policy?

Question 54

Flavin Cosmetics produces 80,000 tubes of lipstick monthly.Itcurrently purchases the cases used in its lipsticks from McGraw Metals.The cases cost Flavin $.045 each and the cost to place an order with McGraw is estimated to be $150.Approximately a half percent of all cases delivered by McGraw are defective so that Flavin must order 80,402 (80,000/.995) cases to support its production. Flavin is considering producing the cases in-house.It can do this by leasing a casing machine at a cost of $9,000 per year which is
capable of producing 200,000 tubes per month.The production set up cost to use this machine is $200 and the incremental production cost of cases is $.038.In this case, there will be no defective cases.
Flavin estimates its holding cost rate for cases is 20% whether they are purchased or produced in-house.
A.Determine whether Flavin should continue to purchase cases from McGraw or begin in-house production if their objective is to minimize the cost of lipstick production.
B.What is Flavin's optimal purchase or production quantity?