Deck 14: Independent Demand Inventory

Question 1

Transportation cost is an example of

A) item cost.
B) ordering cost.
C) carrying cost.
D) storage cost.

Answer 1

ordering cost.

Question 2

Given that unit cost = $25,annual carrying charge = 10%,annual demand = 4,000 units,and ordering cost = $15 per order,the EOQ is

A) 22 units.
B) 155 units.
C) 219 units.
D) 300 units.

Answer 2

219 units.

Question 3

A particular brand of soap has a lead time of three weeks to reorder,a weekly standard deviation of 10 units,and a weekly average usage of 30 units.The reorder point for this soap,assuming a 95% service level (z = 1.645),is

A) 16.45 units.
B) 28.50 units.
C) 106.45 units.
D) 118.49 units.

Answer 3

118.49 units.

Question 4

Which of the following is NOT an assumption of the basic EOQ model?

A) Annual demand is constant and known.
B) Lead time is constant and known.
C) No stockouts are allowed.
D) Quantity discounts are available.

Question 5

Which of the following statements is true about a Q system?

A) It does not have a reorder point but rather a target inventory.
B) The system is completely determined by the two parameters Q and R.
C) It does not have an EOQ because the quantity varies according to demand.
D) The order interval is fixed-not the order quantity.

Question 6

Independent demand inventory consists of

A) inventory whose demand comes from independent suppliers.
B) inventory that is independent of any known rules of demand and supply.
C) demand that is related to the demand for another item.
D) inventory whose demand is determined by market conditions outside the firm.

Question 7

Which cost is NOT part of inventory ordering costs?

A) Transportation costs.
B) Obsolescence costs.
C) Setup costs.
D) Receiving costs.

Question 8

A paint supplier that places orders for different colors of paint for delivery at the same time should use a

A) P system.
B) Q system.
C) dependent demand inventory model.
D) quantity discount model.

Question 9

Which cost defines the cost of capital?

A) Item cost.
B) Storage cost.
C) Deterioration cost.
D) Opportunity cost of investment in inventory.

Question 10

Of the cost elements making up total inventory cost,which is the most difficult to estimate?

A) Stockout costs.
B) Holding costs.
C) Carrying costs.
D) Item cost.

Question 11

The choice between P and Q systems should be based on

A) timing of replenishment.
B) type of record keeping.
C) cost of the item.
D) all of the above.

Question 12

Capacity,as opposed to inventory,

A) is the rate at which a stock can be depleted.
B) covers anticipated changes in demand or supply.
C) consists of resources that provide the potential to produce items.
D) is a stock of raw materials, work in process, or finished goods used to facilitate production or satisfy customer demands.

Question 13

Which of the following statements is NOT true about managing inventory in supply chains?

A) In a supply chain, a single firm typically controls all of the inventories that are required while manufacturing a product.
B) Coordination among supply chain partners is essential while managing inventory across the supply chain.
C) The total cost minimization approach can be applied while managing inventory across the supply chain.
D) Vendor-managed inventory is an initiative shifting responsibility for managing inventory to suppliers.

Question 14

A computerized inventory system checks inventory levels at the end of the week and produces suggested orders for the coming week.What kind of system is this?

A) A periodic review system.
B) A continuous review system.
C) A service level system.
D) An ABC inventory system.

Question 15

Unlike a requirements philosophy of inventory management,a replenishment philosophy

A) calls for orders based on higher-level items.
B) applies to raw materials inventories.
C) is appropriate given independent demand.
D) causes demand to be dependent.

Question 16

The carrying cost for inventory consists of which cost components?

A) Capital cost, obsolescence cost, and ordering cost.
B) Obsolescence cost, capital cost, and stockout cost.
C) Obsolescence cost, storage cost, and capital cost.
D) Storage cost, handling cost, and obsolescence cost.

Question 17

Which of the following is NOT a purpose of inventory?

A) To protect against uncertainties.
B) To allow economic production of batches.
C) To provide for transit.
D) To decrease obsolescence.

Question 18

In the basic EOQ model,if the lead time doubles,the EOQ will

A) decrease by half.
B) double.
C) remain the same.
D) increase, but not double.

Question 19

ABC analysis requires that inventory be classified according to

A) alphabetical order by item name.
B) annual dollar usage.
C) activity-based costs.
D) due date.

Question 20

In the basic EOQ model, if annual demand and carrying costs double, the EOQ

A) doubles.
B) increases, but less than double.
C) decreases.
D) remains the same.

Question 21

Service levels are

A) the percentage of time the system has an item on hand.
B) the percentage of demand filled from stock.
C) the probability that all orders are filled from stock.
D)all of the above.

Question 22

Inventory cost structures incorporate four types of costs.Which of the following is NOT one of those four?

A) Crash (expedite) cost.
B) Item (acquisition) cost.
C) Order (setup) cost.
D) Stockout cost.

Question 23

If the standard deviation of lead time demand is 10 units,management has a preferred service level of 99.9% (z = 3),and holding costs are $0.75 per unit per month,the annual cost of holding safety stock for this product will approximate to

A) $22.50.
B) $270.00.
C) $90.00.
D) $89.91.

Question 24

Demand for an item is 10 units per week,and delivery lead time is 3 weeks.The safety stock is known to be 11 units.Using a Q system,what is the reorder point (R)?

A) Less than 20.
B) 30.
C) 41.
D) None of the above.

Question 25

Safety stock inventory is

A) equivalent to the economic order quantity.
B) providing for inventory that is in transit from one location to another.
C) maintained to absorb uncertainty in, for example, delivery lead time from suppliers.
D) all of the above.

Question 26

Demand for an item is 20 units per week,and delivery lead time is 2 weeks.The safety stock is known to be 14 units.Using a P system,and assuming a P value of 3 weeks,what is the target inventory level (T)?

A) Less than 50.
B) Between 50 and 100 (including the values of 50 and 100).
C)More than 100.
D) None of the above.

Question 27

Inventory position or stock position is defined as

A) inventory on hand - demand rate.
B) inventory on hand + inventory on order.
C) inventory on hand - inventory on order.
D) inventory on hand + replenishment rate.

Question 28

Which of the following statements about ABC inventory classification schemes is FALSE?

A) "A" items typically represent the smallest group in terms of the number of items.
B) As little as 10-20% of the items may account for 60-80% of the annual dollar use.
C) "A" items often justify perpetual inventory recordkeeping.
D) ABC systems typically have more than three classes.

Question 29

Assume uniform annual demand for an item is 50,000 units,order costs are $10.00,and the annual cost of holding one unit in inventory is 5% of the $20.00 acquisition cost.The optimal order quantity is

A) 100.00 units.
B) 224.00 units.
C) 1,000 units.
D) 448.00 units.

Question 30

Correctly complete the following statements.Independent demand and dependent demand differ in that

A) independent demand is certain and is determined from a planned production schedule for finished goods, while dependent demand is uncertain and therefore needs to be forecast.
B) inventory levels of independent demand items may be managed with a requirements philosophy, while inventory levels of dependent demand items may be managed by a replenishment philosophy.
C) finished goods typically experience independent demand, while components of a product experience dependent demand.
D) service firms experience dependent demand, while manufacturing firms experience independent demand.

Question 31

Primary reasons to hold inventory include all of the following EXCEPT

A) to achieve economies of scale.
B) to protect against anticipated changes in demand or supply.
C) to decrease inventory turnover ratio.
D) to provide for transit.

Question 32

Which of the following statements is INCORRECT regarding the EOQ model?

A) EOQ assumes that the lead times are known and fixed.
B) EOQ assumes that the demand rates are constant and are known in advance.
C) EOQ calculations are based on a constant unit item cost and do not take discounts or rebates into consideration
D) The ordering cost or the setup cost is dependent on the number of items ordered or manufactured.

Question 33

Which of the following statements concerning differences between continuous review (Q systems)and periodic review (P systems)inventory systems is FALSE?

A) P systems require a perpetual inventory count, while Q systems require a periodic inventory counting system.
B) In periodic review systems, orders are placed after an elapsed period, P, has passed, for a variable quantity of units.
C) In continuous review systems, orders are placed for a fixed quantity of goods after a variable length of time has passed.
D) Higher than normal demand during the order cycle leads to a shorter time between orders for Q systems, while in P systems it leads to larger order sizes.

Question 34

If the economic order quantity for an item is 140, what is the average number of cycle inventory units?

A) There are no units in cycle inventory.
B) 70 units.
C) 140 units.
D) More than 140 units.

Question 35

At the economic order quantity,

A) the annual ordering cost for an item is greater than the annual holding cost. .
B) the annual ordering cost and annual holding cost for an item are equal.
C) the annual ordering cost for an item is less than the annual holding cost.
D) none of these answers are true.

Question 36

Which of the following statements about service level in a fixed order quantity inventory system is FALSE?

A) Service level is the probability that lead time demand will not exceed the reorder level quantity.
B) Service level policies typically compare the percentage of demand that is met from inventory with the cost of holding inventory.
C) A 95% service level implies that 95% of the time 100% of demand is satisfied.
D) There is a linear relationship between service level and reorder level.

Question 37

Determinants of reorder levels (order point quantities)include all of the following EXCEPT

A) rate of demand.
B) length of lead time.
C) length of the time interval between orders.
D) demand and lead time variability.

Question 38

Which of the following is correct?

A) Anticipation inventory of raw materials may be held when a firm expects raw materials shortages in the future.
B) Pipeline inventory quantities are affected by mode of transportation.
C) Safety stock may be held in raw materials, work-in-process, or finished goods.
D) All of the above.

Question 39

If the actual order quantity Q is much larger than the economic order quantity,

A) the firm is paying high annual holding costs.
B) the firm is paying high annual ordering costs.
C) the firm is paying total costs that are equivalent to EOQ costs.
D) the firm should change its EOQ.

Question 40

If mean daily demand is 20 units,lead time is 7 days,the standard deviation of demand during lead time is 12.0 units,and management has a preferred service level of 99.9% (z = 3),the reorder (R)level for the item would be

A) 176.00 units.
B) 56.00 units.
C) 152.00 units.
D) 104.00 units.

Question 41

Lincoln Machine Tool Company maintains an inventory pool consisting of 10 items.Each of these items has a unique demand pattern and may require a different kind of inventory management system.The annual demand pattern and the unit cost of these items are given in the following table.Conduct an ABC inventory analysis and classify these items into A,B,and C type of inventories.Suggest suitable methods for managing these three distinct types of inventories:

Question 42

The EOQ formula could be modified to express demand and the carrying rate on a monthly basis.

Question 43

A large hospital that batches orders for a variety of surgical supplies with its preferred supplier should use a

A) P system.
B) D system.
C) Q system.
D) Z system.

Question 44

Inventory turnover for a given period can be measured as

A) the ratio between the total sales and the total profit derived by selling the goods.
B) the ratio between the cost of goods sold and the total profit derived by selling the goods.
C) the ratio between the cost of goods sold and the average inventory investment.
D) the ratio between the total inventory investment and the average inventory investment.

Question 45

Given that unit item cost = $30,annual carrying charge = 15%,annual demand = 3,600 units,and ordering cost = $15 per order,the EOQ

A) is 84.85 units.
B) is 154.92 units.
C) is 200 units.
D) cannot be determined from the information given.

Question 46

The average inventory level is defined as the difference between the cycle stock and the safety stock.

Question 47

Hybrid inventory management systems can be derived by combining the benefits of both P and Q types of inventory management systems.

Question 48

Dependent demand items are subject to market forces and often have predictable demand patterns.

Question 49

Transit inventories are also referred to as pipeline inventories because they consist of materials that are on their way from one point to another point in the supply chain.

Question 50

Traditional ABC classification means that inventory

A) is subject to the principles of activity-based costing.
B) is managed according to the first in, first out (FIFO) rule.
C) is tightly controlled for the A, B, and C classes of inventory.
D) is classified according to demand times cost (demand * cost).

Question 51

The Cowboy Saddle Company manufactures plastic saddles that are used in the assembly process of their Mr.Ed doll.If the run time for producing a batch of saddles is 4 days,the rate of production is uniform at 500 saddles per day,and the uniform usage rate is 200 saddles per day,what is the maximum inventory quantity?
(Round to the nearest integer value.)

A) 900 saddles.
B) 1,200 saddles.
C) 1,500 saddles.
D) 1,800 saddles.

Question 52

In an ABC classification,it is logical to employ a periodic review system to monitor "A" items.

Question 53

The economic order quantity (EOQ)model for determining order lot size shows the basic trade-off between which two variables?

A) Demand rate and lead time.
B) Order frequency and inventory level.
C) Demand rate and inventory level.
D) Order frequency and demand rate.

Question 54

A decrease in an item's lead time will increase the amount of safety stock required to maintain a constant service level.

Question 55

Which of the following statements is NOT true about vendor managed inventory (VMI)?

A) VMI is another means of managing inventory.
B) VMI does not provide suppliers with access to the firm's inventory and forecast data.
C) VMI requires collaboration between the supplier and the customer in terms of sharing data.
D) VMI is used in grocery stores for some food items, with the supplier stocking the store.

Question 56

An inventory management system based on a requirements philosophy creates orders from

A) customer requests.
B) forecasts.
C) sales and operations plan (S&OP).
D) master production schedule.

Question 57

In general,it is extremely difficult to estimate stockout costs and hence we use the desired service levels while computing the reorder points.

Question 58

Which of the following factors is most important in determining the reorder point?

A) Carrying cost.
B) Item cost.
C) Order (or setup) cost.
D) Desired service level.

Question 59

Assuming that we are currently placing orders in EOQ amounts,an increase in the order quantity would increase annual ordering costs.

Question 60

A smaller lot size would result in fewer orders and increased inventory levels.