Deck 7: Managing Inventories

Question 1

Jones Company has calculated that the EOQ for a particular item is 1,000 units. However, Jones does not have enough capital to order that many units each time, so it only orders 250 units at a time. This will result in:

A)Higher annual inventory carrying cost than ordering the EOQ quantity.
B)Lower annual inventory carrying cost than ordering the EOQ quantity.
C)Lower annual ordering cost than ordering the EOQ quantity.
D)Cannot be determined.

Answer 1

Lower annual inventory carrying cost than ordering the EOQ quantity.

Question 2

Alpha Company places 10 orders per year with its supplier. Each order is for an amount exactly equal to the EOQ. Alpha has determined its annual inventory carrying cost is $2,000. Alpha carries no safety stock at all. What is Alpha's order cost per order?

A)Cannot be determined without further information
B)$2,000
C)$200
D)$1500

Answer 2

$200

Question 3

Bryson Carpet Mills produces a variety of different carpets. Changing from production of one carpet to another involves a setup cost of $500. One particular carpet costs $8/yard to produce. Annual demand for this style is 50,000 yards. Bryson Mills produces carpet 200 days per year. The production process is most efficient when 2,000 yards/day are produced. Inventory carrying cost is estimated at 20 percent annually. What should be the production order quantity?

A)4,675 yards
B)5,976 yards
C)8,750 yards
D)2,500 yards

Answer 3

5,976 yards

Question 4

University Book Store buys women's polo T-shirts from a supplier according to the price schedule shown below. The store sells 500,000 T-shirts each year. The annual carrying cost of T-shirts is 25 percent, and the ordering cost is $40. What order quantity would give the Book Store the lowest total acquisition cost? (Due to possible differences in rounding, choose the closest answer.)

A)2,139
B)2,237
C)2,500
D)2,614

Question 5

John Jones of Jones Corporation determined that the cost related to processing an invoice from a supplier was approximately $100 per invoice. This cost is an example of:

A)Inventory holding (or carrying) cost.
B)Inventory investment.
C)Wasted expense.
D)Order cost.

Question 6

Taxes and insurance costs are an example of which of the following costs?

A)Ordering cost.
B)Governmental costs.
C)Carrying (or holding) costs.
D)None of these.

Question 7

A batch of Raisin Bran that has been made at Kellogg's but not yet packaged in its final cereal box would be an example of what type of inventory?

A)Raw material
B)Work-in-process
C)Finished goods
D)Maintenance, repair, and operating supplies (MRO)

Question 8

Safety stock exists for which of the following reasons?

A)To allow less expensive purchases by buying more.
B)To allow for transportation time.
C)To provide protection against the uncertainties of supply and demand.
D)None of these.

Question 9

Alpha Company places 10 orders per year with its supplier. Each order is for an amount exactly equal to the EOQ. Alpha's order cost has been determined to be $50 per order. Alpha carries no safety stock at all. What is Alpha's annual inventory carrying cost?

A)Cannot be determined without further information
B)$50
C)$250
D)$500

Question 10

Independent demand inventory models can be used to determine:

A)When to buy and how much to buy.
B)How to reduce stockouts.
C)Stock levels for regular and one-time buys.
D)All of these.

Question 11

Which of the following is NOT a role of inventory?

A)Increasing quality of finished goods
B)Balancing supply and demand
C)Buffering uncertainty in supply or demand
D)Enabling geographical specialization

Question 12

Next year a tire company wants to have an inventory turnover rate of 22 times per year. To achieve this turnover rate, what should be the average number of days of supply?

A)16.6 days
B)36 days
C)0.6 days
D)22 days

Question 13

University Book Store buys women's polo T-shirts from a supplier according to the price schedule shown below. The store sells 500,000 T-shirts each year. The annual carrying cost of T-shirts is 25 percent, and the ordering cost is $40. The lowest total annual acquisition cost for Book Store quantity is closest to (Due to possible differences in rounding, choose the closest answer.):

A)$16,018,000
B)$16,018,708
C)$17,518,707
D)$16,258,000

Question 14

Blue Star Co. has been using the production order quantity inventory model. If annual demand, daily demand, and the production rate increase to four times their original amounts, which of the following is/are possible consequence(s)?

A)The order quantity will double.
B)The order quantity will increase by four times.
C)The order quantity will be cut in half.
D)There is no impact on order quantity.

Question 15

Johnson Company had beginning inventory of $1,000,000 and ending inventory of $1,200,000. Johnson has determined inventory carrying cost to be 25 percent. Johnson's inventory carrying cost was:

A)$250,000.
B)$275,000.
C)$300,000.
D)None of these.

Question 16

Natalie's Cabinets makes cabinets at an average cost of $2,000. Last year, Natalie sold 5,000 units of the cabinets and had an annual turnover rate of 4 times. Natalie has estimated her inventory carrying cost to be 25 percent. What was Natalie's annual inventory carrying cost?

A)$625,000
B)$250,000
C)$312,500
D)$125,000

Question 17

Jones Manufacturing Inc. purchases a component from a Chilean supplier. The demand for that component is exactly 70 units each day. The company is open for business 250 days each year. When the company reorders the product, the lead time from the supplier is exactly 10 days. The product costs $14.00. The company determined that its inventory carrying cost is 20 percent. The company's order cost is $30.00. If the company decides to order 1,750 units each time it places an order, what will be the total annual cost of this policy? (Do not include the product cost in your answer.)

A)$1,500
B)$2,400
C)$2,750
D)$3,400

Question 18

If beginning inventory is $1,000,000, ending inventory is $1,400,000, sales are $10,000,000, and anticipated sales are $50,000 per day, what is the days of supply?

A)28 days
B)70 days
C)60 days
D)32 days

Question 19

Ball Corporation sells aluminum cans to Anheuser-Busch to use in making six-packs of Budweiser. Anheuser-Busch has a warehouse located at its plant in St. Louis which contains boxes of empty cans received from Ball. From Anheuser-Busch's perspective, the cans in this warehouse represent:

A)Raw materials and components inventory.
B)Work in process inventory.
C)Finished goods inventory.
D)MRO inventory.

Question 20

Suppose demand is 45 units a month, average inventory is 60 units, and unit cost is $20. What is the annual inventory turnover?

A)10
B)9
C)0.75
D)15

Question 21

HighLife Corporation has the following information: Average demand = 30 units per day
Average lead time = 40 days
Item unit cost = $45 for orders of less than 400 units
Item unit cost = $40 for orders of 400 units or more
Ordering cost = $50
Inventory carrying cost = 15 percent
The business year is 300 days.Standard deviation of demand during lead time = 90
Desired service level = 95 percent
What is the EOQ if HighLife pays $45/unit? Due to possible differences in rounding, choose the closest answer.

A)287
B)300
C)365
D)398

Question 22

A company has average demand of 30 units per day. Lead time from the supplier averages 7 days. Assume that the combined standard deviation of demand during lead time has been calculated and is equal to 20 units. One unit costs $10 and the inventory carrying cost is 25 percent. What is the reorder point for the company if it decides on a 99 percent service level?

A)243 units
B)257 units
C)77 units
D)210 units

Question 23

What might a company do to reduce the amount of cycle stock it holds?

A)Attempt to reduce supplier lead time.
B)Always take advantage of supplier quantity discounts.
C)Attempt to reduce demand variation.
D)Attempt to reduce order costs.
E)All of these.

Question 24

When small changes generated by a customer produce progressively larger changes at each stage upstream in the supply chain, this is known as:

A)Buffering.
B)Bullwhip effect.
C)Pareto effect.
D)Vendor managed inventory.

Question 25

HighLife Corporation has the following information: Average demand = 30 units per day
Average lead time = 40 days
Item unit cost = $45 for orders of less than 400 units
Item unit cost = $40 for orders of 400 units or more
Ordering cost = $50
Inventory carrying cost = 15 percent
The business year is 300 days.Standard deviation of demand during lead time = 90
Desired service level = 95 percent
What is the safety stock that HighLife Corporation should carry for its desired service level of 95 percent?
1)28 standard deviations cover 90 percent
1)65 standard deviations cover 95 percent
1)96 standard deviations cover 97.5 percent

A)149
B)90
C)86
D)112

Question 26

The ABC analysis used for analyzing inventory is an example of:

A)Safety stock calculation.
B)Regression analysis.
C)Pareto's Law.
D)Inventory carrying cost.

Question 27

HighLife Corporation has the following information: Average demand = 30 units per day
Average lead time = 40 days
Item unit cost = $45 for orders of less than 400 units
Item unit cost = $40 for orders of 400 units or more
Ordering cost = $50
Inventory carrying cost = 15 percent
The business year is 300 days.Standard deviation of demand during lead time = 90
Desired service level = 95 percent
What is the TAC at $40/unit closest to?

A)$351,750
B)$362,325
C)$355,840
D)$362,240

Question 28

Jasper's Grocery places an order for Monster every 15 days. Once the order is placed, delivery to the store typically occurs in 3 days. Average demand is 5 cases per day, and the standard deviation of demand is 1.5 cases per day. The store policy is to stock an amount of inventory that allows for an average stockout condition of 5 percent (1.65 standard deviations) while waiting for replenishment. It is time to place an order, and there are 20 cases on hand. How many units should be ordered?

A)90 cases
B)80 cases
C)75 cases
D)86 cases

Question 29

Which of the following statements is true regarding a periodic review inventory system?

A)Safety stock is not needed when periodic review systems are used.
B)The same quantity of inventory is ordered each time an order is placed.
C)Inventory replenishment orders are placed in equal increments of time.
D)None of the selections are true.

Question 30

___________ inventory is the costliest form of inventory one can hold.

A)Finished goods
B)Raw materials
C)Components
D)Work-in-process

Question 31

A company recently lowered its service performance from 99 percent product availability to 97 percent product availability. The change saved the company exactly $1 million per year in inventory carrying cost. Senior management now wants to lower the service level to 95 percent from 97 percent. Such a further change is likely to save:

A)Less than $1 million.
B)Exactly $1 million.
C)More than $1 million.

Question 32

Which of the following are NOT often associated with a vendor-managed inventory (VMI) arrangements?

A)Long-term commitments from both parties.
B)Supplier representative located at the customer site.
C)Customers recommend to suppliers how they should schedule production.
D)Supplier places replenishment orders.
E)All of these are typically associated with VMI.

Question 33

A company has average demand of 30 units per day. Lead time from the supplier averages 7 days. Assume that the combined standard deviation of demand during lead time has been calculated and is equal to 20 units. One unit costs $10 and the inventory carrying cost is 25 percent. Suppose management decides it wants to offer a 95 percent service level. That is, it is willing to experience a stockout probability of 5 percent during the order cycle. What is the annual cost of this safety stock policy?

A)$82.50
B)$87.50
C)$115.00
D)$62.50

Question 34

At each of its home games, the Washington Check-Kiters football team sells programs that give statistics of the teams involved in the current game's contest. Since each game brings a different visiting team, a program is only of value for one contest, and no returns will be accepted by the supplier. On a per-program basis, the selling price is twice the cost. The target service level that will yield the most profits is:

A)33 percent
B)50 percent
C)67 percent
D)75 percent

Question 35

Which of the following pieces of information is identified in the original 12-digit UPC code?

A) Product price.
B) Where product was manufactured.
C) The manufacturer of the item.
D) A and B.
E) All of these are part of a UPC code.

Question 36

Bill's Food Emporium uses the periodic system to order cans of Cajun seasoning every 30 days. It typically takes the supplier 10 days to resupply Bill. Sales average 8 units per day with a standard deviation of 2 units per day. Bill does not carry any safety stock of Cajun seasoning. If he runs out for a period of time, he doesn't care. Bill just counted his inventory of Cajun seasoning and found 22 cans on the shelf. How many cans should Bill order?

A)342
B)218
C)262
D)298

Question 37

Which of the following might a company try to do to reduce the total amount of safety stock it holds?

A) Implement and use ABC analysis of inventory items.
B) Attempt to reduce variation in supplier lead times.
C) Implement demand management approaches.
D) A and B.
E) All of these.

Question 38

Johnson Manufacturing has decided to consolidate its warehouses and reduce the number of locations from 12 to four. However, Johnson desires to maintain the same service level in terms of the risks of running out of stock in attempting to meet customer demand. As a result, Johnson can expect that:

A)The time to fill customer orders will decrease.
B)The required safety stock will increase by approximately 73 percent.
C)The required safety stock will decline by approximately 42 percent.
D)The required safety stock will decline by approximately 58 percent.

Question 39

You have a one-time opportunity to buy an item. It costs $20 and sells for $50. It has $4 salvage value if it does not sell. What is the target service level?

A)50 percent
B)65.21 percent
C)80 percent
D)66.67 percent

Question 40

When calculating a reorder point (ROP), which of the following factors WOULD NOT affect the calculation?

A)Item's EOQ
B)Delivery lead time.
C)Demand during the delivery lead time.
D)Standard deviation of demand during delivery lead time.
E)All of these would affect the ROP.