Deck 20: Inventory Management: Economic Order Quantity, Jit, and the Theory of Constraints

Question 1

Effective inventory management conserves investment capital and facilitates response to customer demands.

Answer 1

True

Question 2

Throughput is the rate at which an organization generates money through sales.

Answer 2

True

Question 3

Ordering costs are costs of placing and receiving an order and setup costs are the costs of getting equipment and facilities to produce products.

Answer 3

True

Question 4

Competitive pressures have led many companies to favor the JIT inventory approach.

Question 5

The goal of the theory of constraints is to make money in the future by managing constraints.

Question 6

The Kanban system is an information system which ensures that parts or materials are available when needed.

Question 7

The theory of constraints identifies a company's constraints and exploits them.

Question 8

When only one binding constraint exists, the product with the smallest contribution margin will be focused on.

Question 9

Reducing ordering and setup costs interfere with the reduction of inventory costs.

Question 10

Firms face limited resources and limited demand for their products called constraints.

Question 11

JIT inventory management offers alternative solutions that require higher inventories.

Question 12

The major binding constraint in an organization is defined as the drummer, which sets the production rate for the whole plant.

Question 13

The theory of constraints focuses on two operational measures of system performance: inventory expenses and operating expenses.

Question 14

Effective inventory management does not consider inventory-related costs.

Question 15

JIT uses long-term contracts, continuous refilling, and electronic data interchanges to reduce or eliminate ordering costs.

Question 16

When a product mix does not utilize fully its constraints, they are called loose constraints, when used completely, they are called binding constraints.

Question 17

With multiple internal binding constraints, the optimal mix is determined by a graphical approach or the simplex method.

Question 18

External constraints are imposed on a firm from within and internal constraints are imposed electronically.

Question 19

JIT is a manufacturing approach focused on present demand rather than anticipated demand.

Question 20

Just-in-case inventory management is a traditional inventory model based on a wait-until-needed demand.

Question 21

Which of the following is NOT an opportunity cost associated with inventory management?

A) lost sales to customers
B) use of capital tied up in inventory investment
C) cost of expediting
D) all are opportunity costs

Question 22

The cost of preparing equipment and facilities so they can be used to produce a particular product or component is known as

A) ordering costs.
B) setup costs.
C) carrying costs.
D) inventory costs.

Question 23

The inventory management system which represents the continuous goal of eliminating waste is called the
inventory management.

Question 24

Which of the following is NOT an example of an ordering cost?

A) receiving costs
B) salespeople's salaries costs
C) clerical costs of preparing documents
D) insurance costs on shipment

Question 25

The ordering of small, frequent orders

A) minimizes stockout costs.
B) minimizes ordering costs.
C) minimizes carrying costs.
D) minimizes all three.

Question 26

Which of the following costs are considered in the EOQ model?

A) ordering costs
B) selling costs
C) carrying costs
D) both a and c

Question 27

The process of continuous replacement of inventory has been made easier by the use of interchanges.

Question 28

The focus on the goal of making money now and in the future by managing constraints is called the .

Question 29

The system that ensures that parts or materials are available when needed is called the system.

Question 30

The optimal mix chosen which maximizes the total contribution margin given the constraints face by a firm is called
__________ .

Question 31

The costs of holding inventory are called costs.

Question 32

The model which expresses a constrained optimization problem as a linear objective function is called the
__________ model.

Question 33

The manufacturing model which shares the same practices as a JIT manufacturing system is called
manufacturing.

Question 34

Inventory management identifies an economic order quantity that

A) minimizes the total costs of ordering and carrying inventory.
B) maximizes the stockout costs.
C) minimizes the costs of ordering.
D) maximizes the cost of carrying inventory.

Question 35

The traditional inventory model based on anticipated demand is called the inventory management.

Question 36

The is the amount of inventory needed to keep the constrained resource busy for a specified time interval.

Question 37

Which of the following is NOT considered a carrying cost?

A) insurance on the inventory
B) the opportunity cost of funds invested in inventory
C) storage costs
D) receiving costs

Question 38

The cost of acquiring inventory includes

A) setup costs for goods produced internally.
B) cost of insurance on the warehouse for inventory.
C) cost of not having a product when a customer wants one.
D) cost of obsolescence.

Question 39

Which of the following is NOT a cost readily identified with inventory management?

A) cost of selling inventory
B) cost of not having stock on hand
C) cost of holding inventory
D) cost of acquiring inventory

Question 40

The cost of holding inventory is known as

A) ordering cost.
B) setup cost.
C) stock-out cost.
D) carrying cost.

Question 41

Southwestern Supply Company has an economic order quantity for item A of 200 units. The annual demand for the product is 5,000 units, and the cost of placing an order is $8. The carrying cost per unit is

A) $6.00.
B) $2.00.
C) $4.00.
D)$141.00.

Question 42

Comfy Wheels Bus Company produces buses. In order to produce the seats for the buses, special equipment must be set up. The setup cost per frame is $35. The cost of carrying seats in inventory is $6 per seat per year. The company produces 90,000 buses per year. Total carrying costs (rounded to the nearest dollar) associated with the economic order quantity are

A) $3,075.
B) $3,750.
C) $502.
D) $328.

Question 43

Comfy Wheels Bus Company produces buses. In order to produce the seats for the buses, special equipment must be set up. The setup cost per frame is $35. The cost of carrying seats in inventory is $6 per seat per year. The company produces 90,000 buses per year. The number of seats that should be produced per setup in order to minimize the total setup and carrying costs is

A) 933 seats.
B) 2,050 seats.
C) 1,025 seats.
D) 513 seats.

Question 44

Comfy Wheels Bus Company produces buses. In order to produce the seats for the buses, special equipment must be set up. The setup cost per frame is $35. The cost of carrying seats in inventory is $6 per seat per year. The company produces 90,000 buses per year. Total setup costs associated with the economic order quantity are

A) $4,610.
B) $3,073.
C) $3,750.
D) $1,537.

Question 45

Dry Creek Company decreased the size of inventory order quantities that had previously been determined using the EOQ model. What is the impact on the total amount of annual carrying and ordering costs?

A) no change
B) decrease
C) increase
D) cannot be determined

Question 46

The economic order quantity is the order quantity that results in

A) the minimum total annual inventory costs.
B) the maximum total annual inventory costs.
C) no inventory shortages.
D) minimum ordering costs.

Question 47

Which of the following equations determines the total annual ordering costs?

A) Cost of placing an order times the order quantity.
B) Cost of placing an order times the number of orders per year.
C) Cost of placing an order times one-half of the order quantity.
D) Unit carrying costs per year times the order quantity.

Question 48

Safety stock is

A) the cost of holding inventory.
B) a non-value activity and should never be considered.
C) not considered when calculating the reorder point.
D) extra inventory carried to serve as insurance against fluctuations in demand.

Question 49

Alabaster Manufacturing Company increased the size of several inventory order quantities that had previously been determined using the EOQ model. What is the impact on the total amount of annual carrying and ordering costs?

A) no change
B) increase
C) decrease
D) cannot be determined

Question 50

In the economic order quantity equation, the numerator under the square root includes

A) annual demand and cost of placing an order.
B) annual demand and unit carrying cost.
C) unit carrying cost and cost of placing an order.
D) order quantity and cost of placing an order.

Question 51

Southwestern Supply Company has an economic order quantity for item A of 200 units. The annual demand for the product is 5,000 units, and the cost of placing an order is $8. If the company operates 200 days a year and the lead time for the item is five days, what is the reorder point if a safety stock of 50 units is maintained?

A) 4 days
B) 50 units
C) 25 units
D) 175 units

Question 52

Figure 20 - 1
Moriah's Candle Company manufactures candles. The company buys wax in 45­Kilogram containers that cost $17 each. The company uses 25,000 containers per year, and usage occurs evenly throughout the year. The average cost to carry a 45-Kilogram container in inventory per year is $3, and the cost to place an order is $9. The company works 250 days per year.
Refer to Figure 20-1. The economic order quantity (rounded) is

A) 1,000 containers.
B) 750 containers.
C) 45 containers.
D) 387 containers.

Question 53

The order quantity used in the EOQ model is the quantity of inventory ordered

A) during one year.
B) for one job.
C) for one department.
D) at one time.

Question 54

Figure 20 - 1
Moriah's Candle Company manufactures candles. The company buys wax in 45­Kilogram containers that cost $17 each. The company uses 25,000 containers per year, and usage occurs evenly throughout the year. The average cost to carry a 45-Kilogram container in inventory per year is $3, and the cost to place an order is $9. The company works 250 days per year.
Refer to Figure 20-1. The lead time is 4 working days, the average rate of usage is 60 containers per day, and the company carries a safety stock of 25 containers. What is the reorder point?

A) 285 containers
B) 245 containers
C) 265 containers
D) 225 containers

Question 55

Figure 20 - 1
Moriah's Candle Company manufactures candles. The company buys wax in 45­Kilogram containers that cost $17 each. The company uses 25,000 containers per year, and usage occurs evenly throughout the year. The average cost to carry a 45-Kilogram container in inventory per year is $3, and the cost to place an order is $9. The company works 250 days per year.
Refer to Figure 20-1. The lead time is 4 working days and the average rate of usage is 60 containers per day. What is the reorder point?

A) 240 containers
B) 260 containers
C) 220 containers
D) 200 containers

Question 56

Dry Creek Company decreased the size of inventory order quantities that had previously been determined using the EOQ model. If demand remains the same, what is the impact on the number of orders made during the year?

A) no change
B) increase
C) decrease
D) cannot be determined

Question 57

Albuquerque Company has the following information available concerning one of its inventory items:

Question 58

Albuquerque Company has the following information available concerning one of its inventory items:

Question 59

Albuquerque Company has the following information available concerning one of its inventory items: If there is a delay in shipping the item, approximately how many days can be covered by the safety stock?

A) 0.83 days
B) 8.00 days
C) 6.67 days
D) 40.00 days

Question 60

Aeroboats Frame Corporation increased the size of several inventory order quantities that had previously been determined using the EOQ model. What is the impact on the total annual ordering costs?

A) increase
B) decrease
C) no change
D) cannot be determined

Question 61

One of the traditional reasons for holding inventory is to avoid a shutdown due to machine failure. The JIT solution is to

A) reduce setup costs.
B) reduce lead time.
C) use total preventive maintenance.
D) use total quality control.

Question 62

One of the traditional reasons for holding inventory is to avoid shutdowns due to defective parts. The JIT solution is to

A) reduce setup costs.
B) reduce lead time.
C) use total preventive maintenance.
D) use total quality control.

Question 63

One of the traditional reasons for holding finished goods inventories is to ensure a firm's ability to meet delivery dates. The JIT solution is to

A) reduce setup costs.
B) reduce lead time.
C) use total preventive maintenance.
D) use total quality control.

Question 64

Which of the following elements could be determined by using the economic order quantity formula?

A) the optimum size of production run
B) reorder point
C) safety stock
D) annual demand

Question 65

One of the traditional reasons for holding inventory is to take advantage of quantity discounts and hedge against future price increases. The JIT solution is to

A) reduce setup costs.
B) reduce lead time.
C) use long-term contracts with suppliers.
D) use total quality control.

Question 66

Which of the following equations determines the total annual carrying costs when no safety stock is kept?

A) Cost of placing an order × Order quantity
B) Cost of placing an order × Number of orders per year
C) Cost of placing an order × One-half of the order quantity
D) Unit carrying costs per year × One-half of the order quantity

Question 67

When comparing the traditional approach of inventory management to JIT, which of the following statements is true?

A) The traditional approach accepts the existence of setup costs, but not carrying costs or inventories. JIT accepts the existence of setup and carrying costs, but pushes for zero inventories.
B) The traditional approach accepts the existence of carrying costs and inventories, but not setup costs. JIT accepts the existence of setup costs but not carrying costs and pushes for zero inventories.
C) The traditional approach accepts the existence of both setup costs and carrying costs and attempts to find the order quantity that best balances those costs. JIT does not accept either setup costs or carrying costs and pushes for zero inventory levels.
D) The traditional approach does not accept carrying costs or setup costs. JIT minimizes both setup and carrying costs by finding the best order quantity to balance these costs.

Question 68

The objectives of JIT are achieved by

A) controlling costs.
B) improving delivery performance.
C) improving quality.
D) all of these.

Question 69

Olga Company has an economic order quantity for item B of 100 units. The annual demand for the product is 1,400 units, and the unit carrying cost per year is $7. The company operates 200 days a year, the lead time for the item is ten days, and the safety stock is 100 units. What is the reorder point?

A) 70 units
B) 100 units
C) 1000 units
D) 170 units

Question 70

One of the traditional reasons for holding inventory is to minimize total carrying costs and setup costs. The JIT solution is to

A) reduce setup costs.
B) reduce lead time.
C) use total preventive maintenance.
D) use total quality control.

Question 71

The reorder point in the EOQ model is

A) the day of the month for reordering.
B) when all of the inventory has been used.
C) when the inventory level is below the order quantity.
D) the inventory level at which an order for additional units is placed.

Question 72

Figure 20 -2
Walrus Company has the following information available concerning one of its inventory items:

Refer to Figure 20-2. The economic order quantity for this item is

A) 1,500 units.
B) 364 units.
C) 140 units.
D) 725 units.

Question 73

JIT reduces lead times to meet delivery dates by

A) reducing setup times.
B) expediting delivery to customers.
C) having more inventory available.
D) working overtime to fill orders.

Question 74

One of the traditional reasons for holding inventory is to avoid shutdowns due to unavailability of materials. The JIT solution is to

A) reduce setup costs.
B) reduce lead time.
C) use long-term contracts with suppliers.
D) use total preventive maintenance.

Question 75

The JIT approach to inventory management

A) allows greater flexibility as to when products can be manufactured.
B) results in higher inventory levels but reduces ordering and setup costs.
C) results in lower inventory carrying costs.
D) none of these.

Question 76

Figure 20 -2
Walrus Company has the following information available concerning one of its inventory items:

Refer to Figure 20-2. If there is a delay in shipping the item, approximately how many days can be covered by the safety stock?

A) 5 days
B) 31 days
C) 26 days
D) 110 days

Question 77

JIT purchasing is done using

A) short-term contracts emphasizing price.
B) long-term contracts based on quality, reliability, and price.
C) short-term contracts based on quality, reliability, and price.
D) inventory to hedge against stockouts and price increases.

Question 78

Olga Company has an economic order quantity for item B of 100 units. The annual demand for the product is 1,400 units, and the unit carrying cost per year is $7. What is the cost of placing an order?

A) $25
B) $8
C) $200
D) $2

Question 79

Figure 20 -2
Walrus Company has the following information available concerning one of its inventory items:

Refer to Figure 20-2. The reorder point for the inventory item is

A) 275 units.
B) 375 units.
C) 625 units.
D) 1,525 units.

Question 80

JIT avoids shutdowns due to materials shortage in all of the following ways EXCEPT

A) using total preventive maintenance.
B) holding inventory.
C) using total quality control to reduce defective materials.
D) working with suppliers to ensure the availability of materials.