Deck 20: Inventory Management

Question 1

What is the disadvantage of using the tabular method to identify the economic order quantity?

Answer 1

Question 2

Some of the ways that JIT efficiencies are achieved are through reducing the number of vendors, negotiating long-term supply agreements, making less frequent payments, and eliminating inspections.

Answer 2

True

Question 3

Broadbent Industries carries a part that is popular in the manufacture of automatic sprayers. Demand for this part is 4,000 units per year; order costs amount to $30 per order, and holding costs total $1.50 per unit. The company is considering the implementation of an economic order quantity model in an effort to better manage its inventories.
Required:
A. Compute the economic order quantity.
B. Compute total annual inventory costs if Broadbent follows the EOQ policy.

Answer 3

A. The EOQ can be figured by taking the square root of: (2 x annual requirement x cost per order) / annual holding cost per unit. The square root of (2 x 4,000 x $30) /$1.50, or 160,000, is 400.
B. The ordering cost is based on 10 orders (4,000 units / 400 units) x $30, and totals $300; the holding cost is computed on the company's average inventory of 200 units (400 / 2) and amounts to $300 (200 x $1.50). Thus, costs at the EOQ total $600 ($300 + $300).

Question 4

Use the following information to answer the following Questions
Dazzle Graphics uses a special purpose paper on 80% of its jobs. The paper is purchased in 100-sheet packages at a cost of $100 per package. Management estimates that the cost of placing and receiving a typical order is $15, and the annual cost of carrying a package in inventory is $1.50. Dazzle uses 2,600 packages each year. Production is constant, and the lead time to receive an order is 1 week.



-The economic order quantity is approximately:

A) 203 packages.
B) 225 packages.
C) 228 packages.
D) 565 packages.
E) 631 packages.

Question 5

The key to the JIT system is the "pull" approach to controlling manufacturing.

Question 6

Use the following information to answer the following Questions
Dazzle Graphics uses a special purpose paper on 80% of its jobs. The paper is purchased in 100-sheet packages at a cost of $100 per package. Management estimates that the cost of placing and receiving a typical order is $15, and the annual cost of carrying a package in inventory is $1.50. Dazzle uses 2,600 packages each year. Production is constant, and the lead time to receive an order is 1 week.



-The reorder point is:

A) 25 packages.
B) 50 packages.
C) 100 packages.
D) 203 packages.
E) 225 packages.

Question 7

Broadbent Industries carries a part that is popular in the manufacture of automatic sprayers. Demand for this part is 4,000 units per year; order costs amount to $30 per order, and holding costs total $1.50 per unit.
The company, which currently places four orders per year with its suppliers, is considering the implementation of an economic order quantity (EOQ) model to better manage its inventories. Preliminary EOQ calculations revealed an optimal order quantity of 400 units and total annual inventory costs of $600.
Required:
A. In comparison with its current policy, how much will Broadbent save by adopting the EOQ model?
B. Briefly explain the philosophical difference between the EOQ model and the just-in-time model. Which of the two models will likely result in lower holding costs for the firm? Why?

Question 8

The EOQ approach takes the view that no inventory is necessary and can be acquired as needed.

Question 9

Which of the following does not minimize ordering costs when using JIT purchasing?

A) Reducing the number of vendors.
B) Negotiating long-term supply agreements.
C) Making less frequent payments.
D) Maintaining a safety stock.
E) Eliminating inspections.

Question 10

Economic Order Quantity, timing of orders and safety stock are three important considerations in inventory management.
Required:
A. Explain each of these considerations.
B. How is EOQ affected by the timing of orders and safety stock?

Question 11

Which of the following is classified as an inventory shortage cost?

A) Purchase order preparation.
B) Production disruption.
C) Lost sales and lost customers.
D) Spoilage.
E) Both production disruption and lost sales and lost customers.

Question 12

The EOQ model is a mathematical tool for determining the order quantity that maximizes the costs of ordering and holding inventory.

Question 13

At the economic order quantity:

A) total annual inventory costs, holding costs, and ordering costs are all minimized.
B) total annual inventory costs and holding costs are minimized.
C) total annual inventory costs are minimized, and holding costs equal ordering costs.
D) total annual inventory costs are minimized, and holding costs exceed ordering costs.
E) total annual inventory costs are minimized, and ordering costs exceed holding costs.

Question 14

Lagoon Enterprises uses an economic order quantity model and has determined an optimal order size of 500 units. Annual demand is 10,000 units, ordering costs are $50 per order, and holding costs are $4 per unit. The company's annual ordering and holding costs total:

A) $2,000.
B) $3,000.
C) $21,000.
D) $41,000.
E) None of the answers is correct.

Question 15

Inventory holding costs typically include:

A) clerical costs of purchase-order preparation.
B) costs of deterioration, theft, or spoilage.
C) costs associated with lost sales to customers.
D) forgone interest on money tied up in inventory.
E) both costs of deterioration, theft, or spoilage and forgone interest on money tied up in inventory.

Question 16

Inventory decisions involve a delicate balance between three classes of costs: ordering costs, advertising costs, and shipping costs.

Question 17

Inventory holding costs would typically include all of the following except:

A) insurance.
B) theft.
C) transportation.
D) obsolescence.
E) warehouse rent.

Question 18

When comparing EOQ and JIT inventory systems, which of the following statements is false?

A) The EOQ approach takes the viewpoint that some inventory is necessary.
B) The EOQ system assumes a constant order quantity.
C) JIT argues that inventory investments should be minimized.
D) The EOQ system focuses on acquisition and holding costs.
E) JIT argues that safety stocks are necessary to reduce the probability of a stock shortage.

Question 19

When graphing the EOQ, which of the following statements is false?

A) Holding costs are a downward sloping line to the right.
B) The EOQ is represented by the minimum total cost.
C) Ordering costs are a downward sloping line to the right.
D) Average inventory on hand results in higher holding costs.
E) As order size increases, so does average inventory on hand.

Question 20

When considering safety stock and its effect on EOQ, which of the following statements is false?

A) Safety stock is equal to the potential excess usage of an input.
B) The reorder point is affected by the existence of safety stock.
C) Safety stock decreases inventory holding costs.
D) Safety stock decreases the potential costs caused by inventory shortages.
E) Fluctuations in monthly usage of a material indicate the desirability of a safety stock.