Deck 11: Managing Economies of Scale in a Supply Chain: Cycle Inventory

Question 1

To reduce the optimal lot size by a factor of k,the fixed order cost S must be reduced by a factor of k.

Answer 1

False

Question 2

Cycle inventory exists because producing or purchasing in large lots allows a stage of the supply chain to exploit economies of scale and thus increase cost.

Answer 2

False

Question 3

Aggregating across products,retailers,or suppliers in a single order allows for a reduction in lot size for individual products because fixed ordering and transportation costs are now spread across multiple products,retailers,or suppliers.

Answer 3

True

Question 4

A key to reducing cycle inventory is the reduction of lot size.

Question 5

A discount is volume-based if the pricing schedule offers discounts based on the quantity ordered in a single lot.

Question 6

A firm is often better served by ordering a convenient lot size close to the economic order quantity rather than the precise EOQ.

Question 7

For products where the firm has market power,two-part tariffs can be used to achieve coordination in the supply chain and maximize supply chain profits.

Question 8

Although a forward buy is often the retailer's appropriate response and increases their own profits,it usually increases demand variability with a resulting increase in inventory and flow times within the supply chain.

Question 9

Price discrimination is the practice where a firm charges differential prices to maximize profits.

Question 10

Reduction of fixed cost may be achieved by aggregating lots across multiple products,customers,or suppliers.

Question 11

Lot sizes and cycle inventory do not affect the flow time of material within the supply chain.

Question 12

Cycle inventory exists in a supply chain because different stages exploit economies of scale to lower total cost.

Question 13

Cycle inventory is primarily held to take advantage of economies of scale in order to reduce profit within the supply chain.

Question 14

Average flow time resulting from cycle inventory = Cycle Inventory/Demand = Q/2D.

Question 15

Cycle inventory is the physical inventory in the supply chain due to either production or purchases demanded by the customer.

Question 16

The supply chain profit is higher if each stage of the supply chain independently makes its pricing decisions with the objective of maximizing its own profit.

Question 17

The costs considered in lot sizing decisions include material cost,fixed ordering cost,and manufacturing cost.

Question 18

Marginal unit quantity discounts have also been referred to as multi-block tariffs.

Question 19

Pricing schedules with all unit quantity discounts encourage retailers to increase the size of their lots,which reduces the average inventory and flow time in a supply chain.

Question 20

For commodity products where price is set by the market,manufacturers can use lot size-based quantity discounts to achieve coordination in the supply chain and decrease supply chain cost.

Question 21

Inventory holding costs would include which of the following?

A)Transportation cost
B)Buyer time
C)Obsolescence cost
D)Receiving cost

Question 22

In a multiechelon supply chain,the integer rule calls for an integer multiple of retailers to be serviced by each distributor.

Question 23

The effects of fixed costs associated with production or purchasing,quantity discounts offered by suppliers,and short-term price discounts offered by suppliers on lot sizing decisions must be understood by a supply chain manager.

Question 24

In a multiechelon supply chain,it is important for a distributor to distinguish between retailers with high demand and retailers with low demand.

Question 25

Transportation costs due to aggregation can be minimized by coordinating orders coming from the same supplier.

Question 26

All costs that do not vary with the size of the order but are incurred each time an order is placed are referred to as

A)the material cost and are denoted by C.
B)the fixed ordering cost and are denoted by S.
C)the holding cost and are denoted by H.
D)the purchase price and are denoted by P.

Question 27

When demand is steady,cycle inventory and lot size are related as

A)Cycle Inventory = Lot Size × 2.
B)Cycle Inventory = Lot Size*2.
C)Cycle Inventory = Lot Size/2.
D)Cycle Inventory = Lot Size = Q.

Question 28

The average inventory in the supply chain due to either production or purchases in lot sizes that are larger than those demanded by the customer is

A)annual inventory.
B)distribution inventory.
C)cycle inventory.
D)physical inventory.

Question 29

Using EDLP is the best way to reduce costs attributed to shipping.

Question 30

Cycle inventory is primarily held to

A)take advantage of diseconomies of scale and increase cost within the supply chain.
B)take advantage of diseconomies of scale and reduce cost within the supply chain.
C)take advantage of economies of scale and increase cost within the supply chain.
D)take advantage of economies of scale and reduce cost within the supply chain.

Question 31

Total ordering and holding costs

A)are relatively stable.
B)are relatively stable around the economic order quantity.
C)are relatively unstable around the economic order quantity.
D)are unstable.

Question 32

The quantity of inventory that a stage of the supply chain either produces or purchases at a given time is

A)an order.
B)a job.
C)a shipment.
D)a lot or batch.

Question 33

The price paid per unit is referred to as

A)the material cost and is denoted by C.
B)the fixed ordering cost and is denoted by S.
C)the holding cost and is denoted by H.
D)the purchase price and is denoted by P.

Question 34

Economies of scale in purchasing and ordering motivate a manager to

A)increase the lot size and cycle inventory.
B)decrease the lot size and cycle inventory.
C)eliminate inventory.
D)increase the lot size and reduce cycle inventory.

Question 35

Ordering costs would include which of the following?

A)Cost from theft
B)Transportation cost
C)Security cost
D)Damage cost

Question 36

The cost of carrying one unit in inventory for a specified period of time,usually one year,is referred to as

A)the material cost and is denoted by C.
B)the fixed ordering cost and is denoted by S.
C)the holding cost and is denoted by H.
D)the purchase price and is denoted by P.

Question 37

Average flow time resulting from cycle inventory is equal to

A)Cycle Inventory/Demand = Q/2.
B)Cycle Inventory/Demand = Q/2D.
C)Cycle Inventory = Q/2.
D)Cycle Inventory = Lot Size = Q.

Question 38

A graphical plot depicting the level of inventory over time is

A)an inventory graph.
B)a distribution inventory.
C)an inventory drawing.
D)an inventory profile.

Question 39

Cycle inventory exists because producing or purchasing in large lots allows a stage of the supply chain to

A)exploit economies of scale and raise cost.
B)exploit economies of scale and lower cost.
C)exploit customers and lower cost.
D)exploit customers and raise cost.

Question 40

The primary role of cycle inventory is to allow different stages in the supply chain to

A)purchase product in lot sizes that maximize the sum of the material,ordering,and holding cost.
B)purchase product in lot sizes that minimize the sum of the material,ordering,and holding cost.
C)sell product in lot sizes that maximize the sum of the material,ordering,and holding cost.
D)sell product in lot sizes that minimize the sum of the material,ordering,and holding cost.

Question 41

Scenario 11.2 - S&H Mercantile
The S&H Mercantile in Luther is the only game in town for a number of items,and tries valiantly to use only the storage space needed to display items since there is no stock room in the back of the store.One popular item,a 16-ounce can of dehydrated water,takes up 20 square inches of shelf space.The shelf space available for this item measures five feet by four feet.The store manager would like to order a quantity that can fill the shelf space without stacking and without needing to store cans elsewhere in the store.The amount ordered should all be on display once the S&H runs out and ideally would arrive just as the last can is purchased.
Suppose the annual demand is 8,000 units and the cost per can is $3 with a holding cost of 10%.What is the required order cost per lot?

A)38 cents
B)$3.20
C)$32
D)$1.44

Question 42

Scenario 11.3 - Sammy's Sammwiches
Sammy's is the hot new lunch spot among the hipsters,who flock there at noon for their artisanal peanut butter and jelly sandwiches,which sell for $12.95.The sandwiches are made from two slices of their own artisanal bread,which they bake continuously throughout the day at a rate of seven loaves an hour (each loaf contains twenty slices).The actual cost of a loaf of bread is $1 and the cost to hold a loaf is 80%,since freshness is important in baking as well as to hipsters.The cost to run a new batch of a dough is $3 per loaf.Sammy's sells their sandwiches at a rate of fifty per hour.
A key to reducing cycle inventory is

A)the reduction of holding cost.
B)the reduction of manufacturing cost.
C)the reduction of lot size.
D)the reduction of warehouse space.

Question 43

Scenario 11.1 - Bubble and Squeak
The rising popularity of bubble and squeak as a breakfast item on the menu has resulted in a steady demand for peas.Over the course of the past week,457 patrons have ordered the hearty breakfast and each serving contains a half cup of English peas.It costs two cents to hold a half cup of peas in inventory for a year and $3 to place an order (remember they come all the way from England!).It takes two weeks to ship a container from England loaded with peas.
If demand increases by a factor of k,the optimal lot size increases by a factor of

A)k.
B)k/2.
C)k-squared.
D)the square root of k.

Question 44

Scenario 11.1 - Bubble and Squeak
The rising popularity of bubble and squeak as a breakfast item on the menu has resulted in a steady demand for peas.Over the course of the past week,457 patrons have ordered the hearty breakfast and each serving contains a half cup of English peas.It costs two cents to hold a half cup of peas in inventory for a year and $3 to place an order (remember they come all the way from England!).It takes two weeks to ship a container from England loaded with peas.
What is the optimal order quantity?

A)2670 cups
B)17.8 cups
C)1335 cups
D)8.9 cups

Question 45

Scenario 11.3 - Sammy's Sammwiches
Sammy's is the hot new lunch spot among the hipsters,who flock there at noon for their artisanal peanut butter and jelly sandwiches,which sell for $12.95.The sandwiches are made from two slices of their own artisanal bread,which they bake continuously throughout the day at a rate of seven loaves an hour (each loaf contains twenty slices).The actual cost of a loaf of bread is $1 and the cost to hold a loaf is 80%,since freshness is important in baking as well as to hipsters.The cost to run a new batch of a dough is $3 per loaf.Sammy's sells their sandwiches at a rate of fifty per hour.
Aggregating across products,retailers,or suppliers in a single order allows for a reduction in lot size for individual products because

A)fixed ordering and transportation costs are now charged to retailers.
B)fixed ordering and transportation costs are now charged to suppliers.
C)fixed ordering and transportation costs are now spread across multiple products,retailers,or suppliers.
D)holding costs are now charged to retailers or suppliers.

Question 46

Scenario 11.3 - Sammy's Sammwiches
Sammy's is the hot new lunch spot among the hipsters,who flock there at noon for their artisanal peanut butter and jelly sandwiches,which sell for $12.95.The sandwiches are made from two slices of their own artisanal bread,which they bake continuously throughout the day at a rate of seven loaves an hour (each loaf contains twenty slices).The actual cost of a loaf of bread is $1 and the cost to hold a loaf is 80%,since freshness is important in baking as well as to hipsters.The cost to run a new batch of a dough is $3 per loaf.Sammy's sells their sandwiches at a rate of fifty per hour.
What is the cost to run Sammy's at the economic production lot size?

A)$5.46
B)$2.73
C)$1.36
D)$0.68

Question 47

Scenario 11.2 - S&H Mercantile
The S&H Mercantile in Luther is the only game in town for a number of items,and tries valiantly to use only the storage space needed to display items since there is no stock room in the back of the store.One popular item,a 16-ounce can of dehydrated water,takes up 20 square inches of shelf space.The shelf space available for this item measures five feet by four feet.The store manager would like to order a quantity that can fill the shelf space without stacking and without needing to store cans elsewhere in the store.The amount ordered should all be on display once the S&H runs out and ideally would arrive just as the last can is purchased.
Drought conditions spike demand during the summer to an annualized rate of 27,000 cans per year and the price rises to $12 per can with a holding cost of 20%.What is the required order cost per lot?

A)9.2 cents
B)92 cents
C)$9.20
D)$92.00

Question 48

Scenario 11.1 - Bubble and Squeak
The rising popularity of bubble and squeak as a breakfast item on the menu has resulted in a steady demand for peas.Over the course of the past week,457 patrons have ordered the hearty breakfast and each serving contains a half cup of English peas.It costs two cents to hold a half cup of peas in inventory for a year and $3 to place an order (remember they come all the way from England!).It takes two weeks to ship a container from England loaded with peas.
What is the average inventory if they order at the optimal order quantity?

A)2670 cups
B)2000 cups
C)1335 cups
D)667 cups

Question 49

Scenario 11.1 - Bubble and Squeak
The rising popularity of bubble and squeak as a breakfast item on the menu has resulted in a steady demand for peas.Over the course of the past week,457 patrons have ordered the hearty breakfast and each serving contains a half cup of English peas.It costs two cents to hold a half cup of peas in inventory for a year and $3 to place an order (remember they come all the way from England!).It takes two weeks to ship a container from England loaded with peas.
The diner orders at the economic order quantity but an analysis of dates on the cans of peas revealed that the flow time was actually 5 weeks.A quick check revealed that the computer had automatically adjusted up the economic order quantity as demand had risen during the past few months.What is the new weekly demand for English peas?

A)234 half cups
B)78 half cups
C)312 half cups
D)156 half cups

Question 50

A key to reducing lot size without increasing costs is to

A)reduce the holding cost associated with each lot.
B)reduce the fixed cost associated with each lot.
C)reduce the material cost associated with each lot.
D)reduce the manufacturing cost associated with each lot.

Question 51

Scenario 11.1 - Bubble and Squeak
The rising popularity of bubble and squeak as a breakfast item on the menu has resulted in a steady demand for peas.Over the course of the past week,457 patrons have ordered the hearty breakfast and each serving contains a half cup of English peas.It costs two cents to hold a half cup of peas in inventory for a year and $3 to place an order (remember they come all the way from England!).It takes two weeks to ship a container from England loaded with peas.
What is the cost of the inventory policy (excluding cost of goods)if the diner orders at the economic order quantity?

A)$53.40
B)$106.80
C)$26.70
D)$80.10

Question 52

Pricing schedules with all unit quantity discounts encourage retailers to

A)decrease the size of their lots.
B)increase the size of their lots.
C)decrease the size of their inventory.
D)increase the price of their products.

Question 53

In the pricing schedule for marginal unit quantity discounts,

A)the average cost of a unit decreases at a breakpoint.
B)the average cost of a unit increases at a breakpoint.
C)the marginal cost of a unit decreases at a breakpoint.
D)the marginal cost of a unit increases at a breakpoint.

Question 54

Scenario 11.2 - S&H Mercantile
The S&H Mercantile in Luther is the only game in town for a number of items,and tries valiantly to use only the storage space needed to display items since there is no stock room in the back of the store.One popular item,a 16-ounce can of dehydrated water,takes up 20 square inches of shelf space.The shelf space available for this item measures five feet by four feet.The store manager would like to order a quantity that can fill the shelf space without stacking and without needing to store cans elsewhere in the store.The amount ordered should all be on display once the S&H runs out and ideally would arrive just as the last can is purchased.
Drought conditions spike demand during the summer to an annualized rate of 27,000 cans per year and the price rises to $12 per can.If the ordering cost per lot is 75 cents,what is the holding cost percentage?

A)3.1%
B)1.81%
C)31%
D)18.1%

Question 55

Scenario 11.1 - Bubble and Squeak
The rising popularity of bubble and squeak as a breakfast item on the menu has resulted in a steady demand for peas.Over the course of the past week,457 patrons have ordered the hearty breakfast and each serving contains a half cup of English peas.It costs two cents to hold a half cup of peas in inventory for a year and $3 to place an order (remember they come all the way from England!).It takes two weeks to ship a container from England loaded with peas.
How many orders per year does the diner place if they order at the economic order quantity?

A)18
B)9
C)5
D)14

Question 56

A price discount where the pricing schedule offers discounts based on the quantity ordered in a single lot is

A)customer based.
B)lot size based.
C)supplier based.
D)volume based.

Question 57

Scenario 11.2 - S&H Mercantile
The S&H Mercantile in Luther is the only game in town for a number of items,and tries valiantly to use only the storage space needed to display items since there is no stock room in the back of the store.One popular item,a 16-ounce can of dehydrated water,takes up 20 square inches of shelf space.The shelf space available for this item measures five feet by four feet.The store manager would like to order a quantity that can fill the shelf space without stacking and without needing to store cans elsewhere in the store.The amount ordered should all be on display once the S&H runs out and ideally would arrive just as the last can is purchased.
Aggregating across products,retailers,or suppliers in a single order allows for

A)an increase in lot size for individual products.
B)an increase in customer demand.
C)a reduction in holding cost per unit.
D)a reduction in lot size for individual products.

Question 58

Scenario 11.1 - Bubble and Squeak
The rising popularity of bubble and squeak as a breakfast item on the menu has resulted in a steady demand for peas.Over the course of the past week,457 patrons have ordered the hearty breakfast and each serving contains a half cup of English peas.It costs two cents to hold a half cup of peas in inventory for a year and $3 to place an order (remember they come all the way from England!).It takes two weeks to ship a container from England loaded with peas.
What is the average flow time of a half cup of peas if the diner orders at the economic order quantity?

A)8.76 weeks
B)5.84 weeks
C)2.92 weeks
D)11.68 weeks

Question 59

Scenario 11.3 - Sammy's Sammwiches
Sammy's is the hot new lunch spot among the hipsters,who flock there at noon for their artisanal peanut butter and jelly sandwiches,which sell for $12.95.The sandwiches are made from two slices of their own artisanal bread,which they bake continuously throughout the day at a rate of seven loaves an hour (each loaf contains twenty slices).The actual cost of a loaf of bread is $1 and the cost to hold a loaf is 80%,since freshness is important in baking as well as to hipsters.The cost to run a new batch of a dough is $3 per loaf.Sammy's sells their sandwiches at a rate of fifty per hour.
What is the optimal batch size to produce?

A)8.36 loaves
B)1.8 loaves
C)5.56 slices
D)8.36 slices

Question 60

A price discount where the discount is based on the total quantity purchased over a given period,regardless of the number of lots purchased over that period,is

A)customer based.
B)lot size based.
C)supplier based.
D)volume based.

Question 61

In a supply chain where each stage of the supply chain independently makes its pricing decisions with the objective of maximizing its own profit,

A)supply chain profit is lower than a coordinated solution.
B)supply chain profit is higher than a coordinated solution.
C)supply chain profit is about the same as a coordinated solution.
D)supply chain profit will be maximized.

Question 62

Use the information in Scenario 11.4 to determine the average inventory level resulting from purchasing the optimal number of sheets per order.Assume he can buy only an integer-multiple of sheets.

A)7.65
B)20.58
C)38.27
D)50.5

Question 63

The goal of trade promotions is to

A)influence retailers to act in a way that helps the retailer achieve its objectives.
B)influence retailers to act in a way that helps the manufacturer achieve its objectives.
C)influence retailers to act in a way that will maximize supply chain profit.
D)influence retailers to act in a way minimize supply chain cost.

Question 64

Scenario 11.4 - Caffeine and Sugar
With a fixed cost of $100 per order,Nathan decided it was vital to get his money's worth.His monthly demand for energy drinks was 10,000 bottles and holding cost was estimated at 20% of unit cost.The mail order company offered him a couple of possibilities - he could pay $4.00 per bottle for orders of up to 10,000 bottles.After that threshold,he would pay only $3.98 per bottle,and if he ordered 20,00 or more bottles in an order,he would pay only $3.96 per bottle.
What is the best order quantity for Nathan to use?

A)5,477
B)5,505
C)10,000
D)5,491

Question 65

Discounts related to price discrimination will be

A)volume based.
B)unit based.
C)marginally based.
D)lot size based.

Question 66

The retailer can justify the forward buying when

A)they have inadvertently built up a lot of excess inventory.
B)the forward buy allows the manufacturer to smooth demand by shifting it from peak to low-demand periods.
C)it decreases his total cost.
D)A and C only

Question 67

Scenario 11.4 - The Gutter
A rodent infestation has left a landlord with a major cleanup job;in fact,the cleanup will consist of ripping out all the walls and ceilings of an 1860 square foot house to replace them.A trip to the local home improvement store reveals that 4'x8' sheets of drywall have three price points as indicated in the table.Another consideration for the landlord is that he is equipped with only a humble half-ton pickup truck,that can hold at most 20 sheets.His truck sips fuel,so he considers only wear and tear on his vehicle at $5 to haul all the sheets he will use for the job.The holding percentage is 20%.The landlord believes the entire job - all walls and ceiling - will require 10,080 square feet of drywall.

Use the information in Scenario 11.4 to determine the best number of sheets to purchase at a time.(Assume he can buy only an integer-multiple of sheets. )

A)101
B)41
C)21
D)20

Question 68

________ is the practice whereby a firm charges differential prices to maximize profits.

A)Optimal lot sizing
B)Fixed pricing
C)Nonperishable pricing
D)Price discrimination

Question 69

Scenario 11.4 - The Gutter
A rodent infestation has left a landlord with a major cleanup job;in fact,the cleanup will consist of ripping out all the walls and ceilings of an 1860 square foot house to replace them.A trip to the local home improvement store reveals that 4'x8' sheets of drywall have three price points as indicated in the table.Another consideration for the landlord is that he is equipped with only a humble half-ton pickup truck,that can hold at most 20 sheets.His truck sips fuel,so he considers only wear and tear on his vehicle at $5 to haul all the sheets he will use for the job.The holding percentage is 20%.The landlord believes the entire job - all walls and ceiling - will require 10,080 square feet of drywall.

Use the information in Scenario 11.4 to determine the total holding cost resulting from purchasing the optimal number of sheets per order.Assume he can buy only an integer-multiple of sheets.

A)$64.23
B)$92.92
C)$15.59
D)$38.27

Question 70

The practice where a firm charges differential prices to maximize profits is

A)lot pricing.
B)marginal pricing.
C)price incrimination.
D)price discrimination.

Question 71

For products where the firm has market power,coordination in the supply chain can be achieved and supply chain profits maximized through the use of

A)two-part tariffs or volume based quantity discounts.
B)marginal unit quantity discounts.
C)all unit quantity discounts.
D)basic quantity discounts.

Question 72

Replenishment orders in multi-echelon supply chains should be

A)synchronized to increase cycle inventory and order costs.
B)synchronized to facilitate supplier evaluation and selection.
C)synchronized to keep cycle inventory and order costs low.
D)separated to increase cycle inventory and order costs.

Question 73

Trade promotions lead to a significant ________ in lot size and cycle inventory because of forward buying by the ________.

A)decrease;retailer
B)increase;retailer
C)decrease;supplier
D)increase;supplier

Question 74

Quantity discounts lead to

A)a significant buildup of cycle inventory in the supply chain.
B)a slight buildup of cycle inventory in the supply chain.
C)a decrease in cycle inventory in the supply chain.
D)minor fluctuations of cycle inventory in the supply chain.

Question 75

In a supply chain for commodity products,in order to maximize supply chain surplus,the objective of supply chain members should be to

A)supplement the product with a service.
B)maximize revenue.
C)minimize costs.
D)de-commoditize the product.

Question 76

Scenario 11.4 - The Gutter
A rodent infestation has left a landlord with a major cleanup job;in fact,the cleanup will consist of ripping out all the walls and ceilings of an 1860 square foot house to replace them.A trip to the local home improvement store reveals that 4'x8' sheets of drywall have three price points as indicated in the table.Another consideration for the landlord is that he is equipped with only a humble half-ton pickup truck,that can hold at most 20 sheets.His truck sips fuel,so he considers only wear and tear on his vehicle at $5 to haul all the sheets he will use for the job.The holding percentage is 20%.The landlord believes the entire job - all walls and ceiling - will require 10,080 square feet of drywall.

Use the information in Scenario 11.4 to determine the number of sheets of drywall required.

A)315
B)150
C)58.125
D)5.41

Question 77

If decisions made at the retailer and supplier stage serve to maximize total supply chain profits,the supply chain is

A)coordinated.
B)discriminatory.
C)level.
D)best in practice.

Question 78

Consider the $9.40 per sheet figure as the base price and use the information in Scenario 11.4 to answer the following question.What percentage discount from the base price results in an optimal order quantity of 101 sheets?

A)2.16%
B)2.03%
C)1.86%
D)1.42%

Question 79

After a recent tornado,the home improvement store eliminates the quantity discount benefit and raises the price per sheet of drywall to $15.Use the information in Scenario 11.4 to determine the best number of sheets to purchase.

A)101
B)61
C)32
D)20

Question 80

Scenario 11.4 - The Gutter
A rodent infestation has left a landlord with a major cleanup job;in fact,the cleanup will consist of ripping out all the walls and ceilings of an 1860 square foot house to replace them.A trip to the local home improvement store reveals that 4'x8' sheets of drywall have three price points as indicated in the table.Another consideration for the landlord is that he is equipped with only a humble half-ton pickup truck,that can hold at most 20 sheets.His truck sips fuel,so he considers only wear and tear on his vehicle at $5 to haul all the sheets he will use for the job.The holding percentage is 20%.The landlord believes the entire job - all walls and ceiling - will require 10,080 square feet of drywall.

Use the information in Scenario 11.4 to determine the total cost (including the cost of the drywall)resulting from purchasing the optimal number of sheets per order.Assume he can buy only an integer-multiple of sheets.

A)$3,006.98
B)$3,006.51
C)$3,006.04
D)$3,005.67