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Student: ___________________________________________________________________________

1. One important use of inventories in manufacturing is to decouple operations through the use of work in process inventories. True False

2. The objective of inventory management is to minimize the cost of holding inventory. True False

3. A retail store that carries twice the inventory as its competitor will provide twice the customer service level. True False

4. The overall objective of inventory management is to achieve satisfactory levels of customer service while keeping inventory costs reasonable. True False

5. The two main concerns of inventory control relate to the costs and the level of customer service. True False

6. To provide satisfactory levels of customer service while keeping inventory costs within reasonable bounds, two fundamental decisions must be made about inventory: the timing and size of orders. True False

7. In the EOQ formula, holding costs under 10% are expressed as percentages, above 10% are expressed as annual unit costs. True False

8. DVD recorders would be an example of independent demand items. True False

9. Reorder point models are primarily used for dependent demand items. True False

10. An example of inventory holding cost is the cost of moving goods to temporary storage after receipt from a supplier. True False

11. Decoupling operations applies to the railroad industry. True False

12. Interest, insurance, and opportunity costs are all associated with holding costs. True False

13. The A-B-C approach involves classifying inventory items by unit cost, with expensive items classified as ‘A' items and low cost items classified as ‘C' items. True False

14. An inventory buffer adds value and lowers cost in all supply chains. True False

15. In the A-B-C approach, C items typically represent about 15 percent of the number of items, but 60 percent of the dollar usage. True False

16. EOQ inventory models are basically concerned with the timing of orders. True False

17. The average inventory level is inversely related to order size. True False

18. The average inventory level and the number of orders per year are inversely related: As one increases, the other decreases. True False

19. The EOQ should be regarded as an approximate quantity rather than an exact quantity. Thus, rounding the calculated value is acceptable. True False

20. Carrying cost is a function of order size; the larger the order, the higher the inventory carrying cost. True False

21. Understocking an inventory item is a sure sign of inadequate inventory control. True False

22. Annual ordering cost is inversely related to order size. True False

23. The total cost curve is relatively flat near the EOQ. True False

24. Because price isn't a factor in the EOQ formula, quantity discounts won't affect EOQ calculations. True False

25. In the quantity discount model, if holding costs are given as a percentage of unit price, a graph of the total cost curves will have the same EOQ for each curve. True False

26. In the quantity discount model, the optimum quantity will always be found on the lowest total cost curve. True False

27. ROP models indicate to managers the time between orders. True False

28. When to order can be calculated by the ROP and expressed as a quantity. True False

29. The rate of demand is an important factor in determining the ROP. True False

30. The inventory value of the supply chain exceeds the inventory value of the organization's work in process inventory. True False

31. Safety stock is held because we anticipate future demand. True False

32. Variability in demand and/or lead time can be compensated for by safety stock. True False

33. Solving quality problems can lead to lower inventory levels. True False

34. ROP models assume that demand during lead time is composed of a series of dependent daily demands. True False

35. Profit margins tend to be inversely related to inventory turns. True False

36. In the fixed-order interval model, the order size is the same for each order. True False

37. The fixed-order interval model requires a continuous monitoring of inventory levels. True False

38. Discrete stocking levels are used when an organization doesn't want visibility of inventory levels. True False

39. The fixed-order interval model requires a larger amount of safety stock than the ROP model for the same risk of a stockout. True False

40. The single-period model can be very helpful in determining when to order. True False

41. The single-period model can be very helpful in determining how much to order. True False

42. Monitoring inventory turns over time can be used as a measure of performance. True False

43. A single-period model would be used mainly by organizations going out of business. True False

44. The basic EOQ model ignores the purchasing cost. True False

45. When the item is offered for resale, shortage costs in the single-period model can include a charge for loss of customer goodwill. True False

46. In the single-period model, the service level is the probability that demand will not exceed the stocking level in any period. True False

47. A quantity discount will lower the reorder point. True False

48. It is critical that the exact quantity calculated in the EOQ model be ordered. True False

49. Safety stock eliminates all stock outs. True False

50. The calculation of safety stock requires knowledge of demand and lead time variability. True False

51. The two basic issues in inventory are how much to order and when to order. True False

52. Cycle counting can be used in motorcycle inventory control. True False

53. Using the EOQ model, the higher an item's carrying costs, the more frequently it will be ordered. True False

54. The cycle time represents the time between reorder point and receipt of order. True False

55. The cost of placing an order is a function of order size. True False

56. All stock outs must be avoided. True False

57. In the basic EOQ model, annual holding cost is one-half of the total annual cost for all items purchased. True False

58. Quantity discounts are generally given for large number of orders. True False

59. The larger the number of orders placed, the larger the average level of inventory. True False

60. Which of the following is not one of the assumptions of the basic EOQ model? A. Annual demand requirements are known and constant.B. Lead time does not vary.C. Each order is received in a single delivery.D. Quantity discounts are available.E. All of the above are necessary assumptions.

61. Which of the following interactions with vendors would potentially lead to inventory reductions? A. reduce lead timesB. increase safety stockC. less frequent purchasesD. larger batch quantitiesE. longer order intervals

62. A non-linear cost related to order size is the cost of: A. interestB. insuranceC. taxesD. receivingE. space

63. In a two-bin inventory system, the amount contained in the second bin is equal to the: A. ROPB. EOQC. amount in the first binD. optimum stocking levelE. safety stock

64. When carrying costs are stated as a percentage of unit price, the minimum points on the total cost curves: A. Line upB. Equal zeroC. Do not line upD. Cannot be calculatedE. Depend on the percentage assigned

65. Dairy items, fresh fruit and newspapers are items that: A. do not require safety stocksB. cannot be ordered in large quantitiesC. are subject to deterioration and spoilageD. require that prices be lowered every two daysE. have minimal holding costs

66. Which of the following is least likely to be included in order costs? A. processing vendor invoices for paymentB. moving delivered goods to temporary storageC. inspecting incoming goods for quantityD. taking an inventory to determine how much is neededE. temporary storage of delivered goods

67. In an A-B-C system, the typical percentage of the number of items in inventory for A items is about: A. 10B. 30C. 50D. 70E. 90

68. In the A-B-C classification system, items which account for fifteen percent of the total dollar-volume for a majority of the inventory items would be classified as: A. A itemsB. B itemsC. C itemsD. A items plus B itemsE. B items plus C items

69. In the A-B-C classification system, items which account for sixty percent of the total dollar-volume for few inventory items would be classified as: A. A itemsB. B itemsC. C itemsD. A items plus B itemsE. B items plus C items

70. The purpose of "cycle counting" is to: A. count all the items in inventoryB. count bicycles and motorcycles in inventoryC. reduce discrepancies between inventory records and actualD. reduce theftE. count 10% of the items each month

71. The EOQ model is most relevant for which one of the following? A. ordering items with dependent demandB. determination of safety stockC. ordering perishable itemsD. determining fixed interval order quantitiesE. determining fixed order quantities

72. Which is not a true assumption in the EOQ model? A. Production rate is constantB. Lead time doesn't varyC. No more than 3 items are involvedD. Usage rate is constantE. No quantity discounts

73. In a supermarket, a vendor's restocking the shelves every Monday morning is an example of: A. safety stock replenishmentB. economic order quantitiesC. reorder pointsD. fixed order intervalE. blanket ordering

74. A cycle count program will usually require that ‘A' items be counted: A. daily.B. once a week.C. monthly.D. quarterly.E. more frequently than annually.

75. A risk avoider would want ______ safety stock. A. LessB. MoreC. The sameD. ZeroE. 50%

76. In the basic EOQ model, if annual demand doubles, the effect on the EOQ is: A. It doubles.B. It is four times its previous amount.C. It is half its previous amount.D. It is about 70 percent of its previous amount.E. It increases by about 40 percent.

77. In the basic EOQ model, if lead time increases from five to 10 days, the EOQ will: A. doubleB. increase, but not doubleC. decrease by a factor of twoD. remain the sameE. none of the above

78. In the basic EOQ model, an annual demand of 40 units, an ordering cost of $5, and a holding cost of $1 per unit per year will result in an EOQ of: A. 20B. square root of 200C. 200D. 400E. none of these

79. In the basic EOQ model, if D = 60 per month, S = $12, and H = $10 per unit per month, EOQ is: A. 10B. 12C. 24D. 72E. 144

80. In the basic EOQ model, if annual demand is 50, carrying cost is $2, and ordering cost is $15, EOQ is approximately: A. 11B. 20C. 24D. 28E. 375

81. Which of the following is not true for Economic Production Quantity model? A. Usage rate is constant.B. Production rate exceeds usage rate.C. Run size exceeds maximum inventory.D. There are no ordering or setup costs.E. Average inventory is one-half maximum inventory.

82. Given the same demand, setup/ordering costs, and carrying costs, the EOQ calculated using incremental replenishment will be ____________ if instantaneous replenishment was assumed: A. greater than the EOQB. equal to the EOQC. smaller than the EOQD. greater than or equal to the EOQE. smaller than or equal to the EOQ

83. The introduction of quantity discounts will cause the optimum order quantity to be: A. smallerB. unchangedC. greaterD. smaller or unchangedE. unchanged or greater

84. A fill rate is the percentage of _____ filled by stock on hand. A. ShipmentsB. DemandC. InventoryD. Safety stockE. Lead time

85. In the quantity discount model, with carrying cost stated as a percentage of unit purchase price, in order for the EOQ of the lowest curve to be optimum, it must: A. have the lowest total costB. be in a feasible rangeC. be to the left of the price break quantity for that priceD. have the largest quantity compared to other EOQ'sE. none of the above

86. Which one of the following is not generally a determinant of the reorder point? A. rate of demandB. length of lead timeC. lead time variabilityD. stockout riskE. purchase cost

87. If no variations in demand or lead time exist, the ROP will equal: A. the EOQB. expected usage during lead timeC. safety stockD. the service levelE. the EOQ plus safety stock

88. If average demand for an inventory item is 200 units per day, lead time is three days, and safety stock is 100 units, the reorder point is: A. 100 unitsB. 200 unitsC. 300 unitsD. 600 unitsE. 700 units

89. Which one of the following is implied by a "lead time" service level of 95 percent? A. Approximately 95 percent of demand during lead time will be satisfied.B. Approximately 95 percent of inventory will be used during lead time.C. The probability is 95 percent that demand during lead time will exactly equal the amount on hand at the beginning of lead time.D. The probability is 95 percent that demand during lead time will not exceed the amount on hand at the beginning of lead time.E. none of the above

90. Which one of the following is implied by an "annual" service level of 95 percent? A. Approximately 95 percent of demand during lead time will be satisfied.B. The probability is 95 percent that demand will exceed supply during lead time.C. The probability is 95 percent that demand will equal supply during lead time.D. The probability is 95 percent that demand will not exceed supply during lead time.E. None of the above.

91. Daily usage is exactly 60 gallons per day. Lead time is normally distributed with a mean of 10 days and a standard deviation of 2 days. What is the standard deviation of demand during lead time? A. 60 x 2B. 60 times the square root of 2C. 60 times the square root of 10D. 60 x 10E. none of the above

92. Lead time is exactly 20 days long. Daily demand is normally distributed with a mean of 10 gallons per day and a standard deviation of 2 gallons. What is the standard deviation of demand during lead time? A. 20 x 2B. 20 x 10C. 2 times the square root of 20D. 2 times the square root of 10E. none of the above

93. All of the following are possible reasons for using the fixed order interval model except: A. Supplier policy encourages use.B. Grouping orders can save in shipping costs.C. The required safety stock is lower than with an EOQ/ROP model.D. It is suited to periodic checks of inventory levels rather than continuous monitoring.E. Continuous monitoring is not practical.

94. Which of these products would be most apt to involve the use of a single-period model? A. gold coinsB. hammersC. fresh fishD. calculatorsE. frozen corn

95. In a single-period model, if shortage and excess costs are equal, then the optimum service level is: A. 0B. .33C. .50D. .67E. none of these

96. In a single-period model, if shortage cost is four times excess cost, then the optimum service level is ___ percent. A. 100B. 80C. 60D. 40E. 20

97. In the single-period model, if excess cost is double shortage cost, the approximate stockout risk, assuming an optimum service level, is ___ percent. A. 100B. 67C. 50D. 33E. 5

98. If, in a single-period inventory situation, the probabilities of demand being 1, 2, 3, or 4 units are .3, .3, .2, and .2, respectively. If two units are stocked, what is the probability of selling both of them? A. .5B. .6C. .7D. .8E. none of these

99. The management of supply chain inventories focuses on: A. internal inventoriesB. external inventoriesC. both internal and external inventoriesD. safety stock eliminationE. optimizing reorder points

100. An operations strategy for inventory management should work towards: A. increasing lot sizesB. decreasing lot sizesC. increasing safety stocksD. decreasing service levelsE. increasing order quantities

101. Cycle stock inventory is intended to deal with ________. A. excess costsB. shortage costsC. stockoutsD. expected demandE. quantity discounts

102. An operations strategy which recognizes high carrying costs and reduces ordering costs will result in: A. unchanged order quantitiesB. slightly decreased order quantitiesC. greatly decreased order quantitiesD. slightly increased order quantitiesE. greatly increased order quantities

103. The need for safety stocks can be reduced by an operations strategy which: A. increases lead timeB. increases lead time variabilityC. increases lot sizesD. decreases ordering costsE. decreases lead time variability

104. If average demand for an item is 20 units per day, safety stock is 50 units, and lead time is four days, the ROP will be: A. 20B. 50C. 70D. 80E. 130

105. With an A-B-C system, an item that had a high demand but a low annual dollar volume would probably be classified as: A. AB. BC. CD. none of these

106. The fixed order interval model would be most likely to be used for this situation: A. A company has switched from mass production to lean production.B. Production is done in batches.C. Spare parts are ordered when a new machine is purchased.D. Grouping orders can save shipping costs.E. none of these

107. Which item would be least likely to be ordered under a fixed order interval system? A. textbooks at a college bookstoreB. auto parts at an assembly plantC. cards at a gift shopD. canned peas at a supermarketE. none of these

108. Which one of these would not be a factor in determining the reorder point? A. the EOQB. the lead timeC. the variability of demandD. the demand or usage rateE. all are factors

109. A car rental agency uses 96 boxes of staples a year. The boxes cost $4 each. It costs $10 to order staples, and carrying costs are $0.80 per box on an annual basis.Determine:(A) the order quantity that will minimize the sum of ordering and holding boxes of staples(B) the annual cost of ordering and carrying the boxes of staples

110. A service garage uses 120 boxes of cleaning cloths a year. The boxes cost $6 each. Ordering cost is $3 and holding cost is 10 percent of purchase cost per unit on an annual basis.Determine:(A) The economic order quantity(B) The total cost of carrying the cloths (excluding purchase price)(C) The average inventory

111. A shop that makes candles offers a scented candle, which has a monthly demand of 360 boxes. Candles can be produced at a rate of 36 boxes per day. The shop operates 20 days a month. Assume that demand is uniform throughout the month. Setup cost is $60 for a run, and holding cost is $2 per box on a monthly basis.Determine the following:(A) the economic run size(B) the maximum inventory(C) the number of days in a run

112. Estimated demand for gold-filled lockets at Sam's Bargain Jewelry and Housewares is 2,420 lockets a year. Manager Veronica Winters has indicated that ordering cost is $45, and that the following price schedule applies: 1 to 599 lockets, $.90 each; 600 to 1,199 lockets, $.80 each; and 1,200 or more, $.75 each. What order size will minimize total cost if carrying cost is $.18 per locket on an annual basis?

113. Suppose that you are the manager of a production department that uses 400 boxes of rivets per year. The supplier quotes you a price of $8.50 per box for an order size of 199 boxes or less, a price of $8.00 per box for orders of 200 to 999 boxes, and a price of $7.50 per box for an order of 1,000 or more boxes. You assign a holding cost of 20 percent of the price to this inventory. What order quantity would you use if the objective is to minimize total annual costs of holding, purchasing, and ordering? Assume ordering cost is $80/order.

114. The operator of a concession at a downtown location estimates that he will sell 400 bags of circus peanuts during a month. Carrying costs are 17 percent of unit price and ordering cost is $22. The price schedule for bags of peanuts is: 1 to 199, $1.00 each; 200 to 499, $.94 each; and 500 or more $.87 each. What order size would be most economical?

115. A dry cleaning firm uses an average of 20 gallons of cleaning fluid a day. Usage tends to be normally distributed with a standard deviation of two gallons per day. Lead time is four days, and the desired service level is 92 percent. What amount of safety stock is appropriate if a fixed order size of 600 gallons is used?

116. Suppose that usage of cooking oil at Harry's Fish Fry is normally distributed with an average of 15 gallons/day and a standard deviation of two gallons/day. Harry has just fired the manager and taken over operating the restaurant himself. Harry has asked you to help him decide how to reorder cooking oil in order to achieve a service level which is seven times the risk of stockout (7/8). Lead time is eight days. Assume that cooking oil can be ordered as needed.

117. A bakery's use of corn sweetener is normally distributed with a mean of 80 gallons per day and a standard deviation of four gallons per day. Lead time for delivery of the corn sweetener is normal with a mean of six days and a standard deviation of two days. If the manager wants a service level of 99 percent, what reorder point should be used?

118. A manager reorders lubricant when the amount on-hand reaches 422 pounds. Average daily usage is 45 pounds, which is normally distributed with a standard deviation of three pounds per day. Lead time is nine days. What is the risk of a stockout?

119. Given the following information:Order quantity = 300; = 20 units; desired lead time service level = .86.Find:(A) the expected number of units short per cycle(B) the annual service level

120. A company can produce a part it uses in an assembly operation at the rate of 50 an hour. The company operates eight hours a day, 300 days a year. Daily usage of the part is 300 parts. The company uses the part every day. The run size is 6,000 parts. The annual holding cost is $2 per unit, and setup cost is $100.(A) How many runs per year will there be?(B) While production is occurring, how many parts per day are being added to inventory?(C) Assuming that production begins when there are no parts on hand, what is the maximum number of parts in inventory?(D) The machine is dedicated to this product. Every so often, preventive maintenance, which requires six working days, must be performed on it. Does this interrupt production cycles, or is there enough time between cycles to perform the maintenance? Explain.

121. The injection molding department of a company uses 40 pounds of a powder a day. Inventory is reordered when the amount on hand is 240 pounds. Lead time averages five days. It is normally distributed and has a standard deviation of two days. What is the probability of a stockout during lead time?

122. A shop owner uses a reorder point approach to restocking a certain raw material. Lead time is six days. Usage of the material during lead time is normally distributed with a mean of 42 pounds and a standard deviation of 4 pounds. When should the raw material be reordered if the acceptable risk of a stockout is 3%?

123. The manager of a bakery orders three 'cake-to-go' wedding cakes every Saturday to accommodate last minute purchases. Demand for the cakes can be described by a Poisson distribution that has a mean of 2. The cakes cost $10 each to prepare, and they sell for $26 each. Any cakes that haven't been sold by the end of the day are sold for half price the next day. Usually, half of those are sold and the rest are tossed. What stocking level would be appropriate?

124. A manager has just received a revised price schedule from a vendor. What order quantity should the manager use in order to minimize total costs? Annual Demand is 120 units, ordering cost is $8, and annual carrying cost is $1 per unit.

A manufacturer is contemplating a switch from buying to producing a certain item. Setup cost would be the same as ordering cost. The production rate would be about double the usage rate.

125. Compared to the EOQ, the economic production quantity would be approximately: A. the sameB. 20 percent largerC. 40 percent largerD. 20 percent smallerE. 40 percent smaller

126. Compared to the EOQ, the maximum inventory would be approximately: A. 70 percent higherB. 30 percent higherC. the sameD. 30 percent lowerE. 70 percent lower

The manager of the Quick Stop Corner Convenience Store (which never closes) sells four cases of Stein beer each day. Order costs are $8.00 per order, and Stein beer costs $.80 per six-pack (each case of Stein beer contains four six-packs). Orders arrive three days from the time they are placed. Daily holding costs are equal to five percent of the cost of the beer.

127. At what point should he reorder Stein beer? A. 0 cases remainingB. 4 cases remainingC. 12 cases remainingD. 16 cases remainingE. 20 cases remaining

128. If he were to order 16 cases of Stein beer at a time, what would be the length of an order cycle? A. 0.25 daysB. 3 daysC. 1 dayD. 4 daysE. 20 days

129. If he were to order 16 cases of Stein beer at a time, what would be the average inventory level? A. 4 casesB. 12 casesC. 8 casesD. 20 casesE. 16 cases

130. If he were to order 16 cases of Stein beer at a time, what would be the daily total inventory costs, EXCLUDING the cost of the beer? A. $2.00B. $4.00C. $1.28D. $3.28E. $2.56

131. What is the economic order quantity for Stein beer? A. 8 casesB. 11 casesC. 14 casesD. 20 casesE. 32 cases

Ann Chovies, owner of the Perfect Pasta Pizza Parlor, uses 20 pounds of pepperoni each day in preparing pizzas. Order costs for pepperoni are $10.00 per order, and carrying costs are 4 cents per pound per day. Lead time for each order is 3 days, and the pepperoni itself costs $3.00 per pound.

132. At what point should she reorder pepperoni? A. 20 pounds remainingB. 40 pounds remainingC. 60 pounds remainingD. 80 pounds remainingE. 100 pounds remaining

133. If she were to order 80 pounds of pepperoni at a time, what would be the length of an order cycle? A. 0 daysB. 0.25 daysC. 3 daysD. 4 daysE. 5 days

134. If she were to order 80 pounds of pepperoni at a time, what would be the average inventory level? A. 20 poundsB. 40 poundsC. 60 poundsD. 80 poundsE. 100 pounds

135. If she were to order 80 pounds of pepperoni at a time, what would be the total daily costs, including the cost of the pepperoni? A. $60.00B. $63.20C. $64.00D. $64.10E. $65.00

136. What is the economic order quantity for pepperoni? A. 20 poundsB. 40 poundsC. 60 poundsD. 80 poundsE. 100 pounds

The Operations Manager for Shadyside Savings & Loan orders cash from her home office for her very popular "BIG BUCKS" automated teller machine, which only dispenses $100 bills. She estimates that this machine dispenses an average of 12,500 bills per month, and that carrying a bill in inventory costs 10 percent of its value annually. She knows that each order for these bills costs $300 for clerical and armored car delivery costs, and that order lead time is six days.

137. Assuming a thirty-day month, at what point should bills be reordered? A. 0 bills remainingB. 417 bills remainingC. 2,500 bills remainingD. 10,000 bills remainingE. 12,500 bills remaining

138. Assuming a thirty-day month, if she were to order 6,000 bills at a time, what would be the length of an order cycle? A. 0.48 daysB. 2.08 daysC. 6 daysD. 8.4 daysE. 14.4 days

139. If she were to order 6,000 bills at a time, what would be the dollar value of the average inventory level? A. $3,000B. $6,000C. $12,500D. $300,000E. $600,000

140. If she were to order 6,000 bills at a time, what would be the average monthly total costs, EXCLUDING the value of the bills? A. $625B. $1,250C. $2,500D. $3,125E. $37,500

141. What is the economic order quantity? A. 600 billsB. 3,000 billsC. 949 billsD. 6,215 billsE. 12,500 bills

Given the following data for a particular inventory item:

142. What is the economic order quantity for this item?

143. For the economic order quantity, what is the length of an order cycle?

144. For the economic order quantity, what is the reorder point?

145. For the economic order quantity, what is the average inventory level?

146. For the economic order quantity, what are average weekly ordering costs?

147. For the economic order quantity, what are average weekly carrying costs?

148. For the economic order quantity, what are average weekly total costs, including the cost of the inventory item?

The materials manager for a billiard ball maker must periodically place orders for resin, one of the raw materials used in producing billiard balls. She knows that manufacturing uses resin at a rate of 50 kilograms each day, and that it costs $.04 per day to carry a kilogram of resin in inventory. She also knows that the order costs for resin are $100 per order, and that the lead time for delivery is four (4) days.

149. At what point should resin be reordered? A. 0 kilograms remainingB. 50 kilograms remainingC. 200 kilograms remainingD. 400 kilograms remainingE. 500 kilograms remaining

150. If order size was 1,000 kilograms of resin, what would be the length of an order cycle? A. 0.05 daysB. 4 daysC. 16 daysD. 20 daysE. 50 days

151. If the order size was 1,000 kilograms of resin, what would be the average inventory level? A. 50 kilogramsB. 200 kilogramsC. 500 kilogramsD. 800 kilogramsE. 1,000 kilograms

152. If the order size was 1,000 kilograms of resin, what would be the daily total inventory costs, EXCLUDING the cost of the resin? A. $5B. $10C. $20D. $25E. $40

153. What is the economic order quantity for resin? A. 50 kilogramsB. 100 kilogramsC. 250 kilogramsD. 500 kilogramsE. 1,000 kilograms

154. A firm stocks a seasonal item that it buys for $22/unit and sells for $29 unit. During the season, daily demand can be described using a Poisson distribution with a mean of 2.4. Because of the nature of the item, units remaining at the close of business each day must be removed at a cost of $2 each. What is the optimum stocking level, and what is the effective service level?

155. Joe's Coffee Shoppe has fresh doughnuts delivered each morning. Daily demand for plain doughnuts is approximately normal with a mean of 200 and a standard deviation of 15. Joe pays $1.20 per dozen and has a standing order for 16 dozen. Joe and the staff eat any leftovers. What is the implied shortage cost?

156. A restaurant prepares Peking Duck daily at a cost of $18 per duck. Each duck generates revenue of $47 if sold. Demand for Peking Duck can be described by a Poisson distribution with a mean of 4.2 ducks per day. Unsold ducks at the end of each day are converted to duck soup at an additional cost of $5 over and above the resulting value as soup. How many ducks should be prepared each day?

157. A machine is expected to use approximately three spare parts during its useful life. The spares cost $200 each and have no salvage value or other use. The manager has ordered five spares. Assuming a Poisson usage rate, what range of shortage cost is implied?

158. A manager intends to order a new machine and must now decide on the number of spare parts to order along with the machine. The parts cost $400 each and have no salvage value. The manager has compiled a frequency distribution for the probable usage of spare parts, as shown. For what range of shortage costs would stocking one spare part constitute an optimal decision?Number of

The Corner Newsstand has demand for a certain weekly magazine that can be approximated by a Poisson distribution with a mean of 9.0. Magazines are purchased for $1.50.

159. If unsold copies can be returned for half credit and the owner stocks ten copies, what is the implied range of shortage cost?

160. If unsold copies must be destroyed and copies sell for $4.00 each, find the optimum stocking level.

161. If unsold copies can be returned for half credit and copies sell for $4.25 each, find the optimal stocking level.

162. Demand for a component averages 80 units per week, with a weekly standard deviation of demand of 14 units. The current supplier of this component offers a four-week lead time. Stockout risk is to be kept at 8%. Assume that it costs $50 to hold one unit in inventory for a year. Suppose the annual cost for the items would be $500 higher if they were purchased from another vendor, but that vendor would offer a two-week lead time. Would it be better to go with the more-expensive but more-responsive vendor?

ch13 Key

1. One important use of inventories in manufacturing is to decouple operations through the use of work in process inventories. TRUE

Decoupling operations is an important use of inventories.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: MediumLearning Objective: 13-01 Define the term inventory; list the major reasons for holding inventories; and list the main requirements for effective inventory management.Stevenson - Chapter 13 #1Topic Area: The Nature and Importance of Inventories

2. The objective of inventory management is to minimize the cost of holding inventory. FALSE

The objective of inventory management is to allow satisfactory customer service while keeping costs down.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: EasyLearning Objective: 13-04 Explain the objectives of inventory management.Stevenson - Chapter 13 #2Topic Area: Requirements for Effective Inventory Management

3. A retail store that carries twice the inventory as its competitor will provide twice the customer service level. FALSE

There is a limit to how high service level can go; if the competitor's service level is 90%, the retailer can't double that.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: MediumLearning Objective: 13-02 Discuss the nature and importance of service inventories.Stevenson - Chapter 13 #3Topic Area: The Nature and Importance of Inventories

4. The overall objective of inventory management is to achieve satisfactory levels of customer service while keeping inventory costs reasonable. TRUE

This is the overall objective of inventory management.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: EasyLearning Objective: 13-04 Explain the objectives of inventory management.Stevenson - Chapter 13 #4Topic Area: The Nature and Importance of Inventories

5. The two main concerns of inventory control relate to the costs and the level of customer service. TRUE

These are the essential facets of inventory control.

AACSB: AnalyticBlooms: ApplyDifficulty: EasyLearning Objective: 13-04 Explain the objectives of inventory management.Stevenson - Chapter 13 #5Topic Area: The Nature and Importance of Inventories

6. To provide satisfactory levels of customer service while keeping inventory costs within reasonable bounds, two fundamental decisions must be made about inventory: the timing and size of orders. TRUE

These are the fundamental decisions regarding inventory control.

AACSB: AnalyticBlooms: ApplyDifficulty: EasyLearning Objective: 13-04 Explain the objectives of inventory management.Stevenson - Chapter 13 #6Topic Area: The Nature and Importance of Inventories

7. In the EOQ formula, holding costs under 10% are expressed as percentages, above 10% are expressed as annual unit costs. FALSE

Holding costs are expressed in monetary terms, whether as a set value or as a percentage of the per-unit cost.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: MediumLearning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems.Stevenson - Chapter 13 #7Topic Area: How Much to Order: Economic Order Quantity Models

8. DVD recorders would be an example of independent demand items. TRUE

Components of the DVD recorders would be dependent demand items.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: EasyLearning Objective: 13-01 Define the term inventory; list the major reasons for holding inventories; and list the main requirements for effective inventory management.Stevenson - Chapter 13 #8Topic Area: Introduction

9. Reorder point models are primarily used for dependent demand items. FALSE

Reorder point models are primarily used for independent demand items.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: MediumLearning Objective: 13-09 Describe reorder point models and solve typical problems.Stevenson - Chapter 13 #9Topic Area: Reorder Point Ordering

10. An example of inventory holding cost is the cost of moving goods to temporary storage after receipt from a supplier. FALSE

These are ordering costs.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: HardLearning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems.Stevenson - Chapter 13 #10Topic Area: Requirements for Effective Inventory Management

11. Decoupling operations applies to the railroad industry. FALSE

Decoupling refers to buffering operations in manufacturing.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: EasyLearning Objective: 13-01 Define the term inventory; list the major reasons for holding inventories; and list the main requirements for effective inventory management.Stevenson - Chapter 13 #11Topic Area: The Nature and Importance of Inventories

12. Interest, insurance, and opportunity costs are all associated with holding costs. TRUE

These are holding costs.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: EasyLearning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems.Stevenson - Chapter 13 #12Topic Area: Requirements for Effective Inventory Management

13. The A-B-C approach involves classifying inventory items by unit cost, with expensive items classified as ‘A' items and low cost items classified as ‘C' items. FALSE

A-B-C approach classifies inventory according to some measure of importance.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: MediumLearning Objective: 13-05 Describe the A-B-C approach and explain how it is useful.Stevenson - Chapter 13 #13Topic Area: Requirements for Effective Inventory Management

14. An inventory buffer adds value and lowers cost in all supply chains. FALSE

Many buffers increase costs across supply chains.


15. In the A-B-C approach, C items typically represent about 15 percent of the number of items, but 60 percent of the dollar usage. FALSE

C items typically represent about 60 percent of the number of items and about 15 percent of the dollar usage.


16. EOQ inventory models are basically concerned with the timing of orders. FALSE

EOQ models are concerned with the size of orders.


17. The average inventory level is inversely related to order size. FALSE

The average inventory level is positively related to order size.


18. The average inventory level and the number of orders per year are inversely related: As one increases, the other decreases. TRUE

These are inversely related.


19. The EOQ should be regarded as an approximate quantity rather than an exact quantity. Thus, rounding the calculated value is acceptable. TRUE

The total cost function is relatively flat, so rounding costs little.


20. Carrying cost is a function of order size; the larger the order, the higher the inventory carrying cost. TRUE

Larger order quantities lead to higher inventory carrying cost.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: EasyLearning Objective: 13-04 Explain the objectives of inventory management.Stevenson - Chapter 13 #20Topic Area: How Much to Order: Economic Order Quantity Models

21. Understocking an inventory item is a sure sign of inadequate inventory control. FALSE

Having an occasional stockout is not necessarily a sign of inadequate inventory control.

AACSB: Reflective ThinkingBlooms: UnderstandDifficulty: HardLearning Objective: 13-01 Define the term inventory; list the major reasons for holding inventories; and list the main requirements for effective inventory management.Stevenson - Chapter 13 #21Topic Area: Reorder Point Ordering

22. Annual ordering cost is inversely related to order size. TRUE

Annual ordering cost decreases as order size increases.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: EasyLearning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems.Stevenson - Chapter 13 #22Topic Area: How Much to Order: Economic Order Quantity Models

23. The total cost curve is relatively flat near the EOQ. TRUE

Thus approximating the EOQ can be a very good solution.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: EasyLearning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems.Stevenson - Chapter 13 #23Topic Area: How Much to Order: Economic Order Quantity Models

24. Because price isn't a factor in the EOQ formula, quantity discounts won't affect EOQ calculations. FALSE

If quantity discounts are offered, the EOQ might vary based on different holding costs.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: EasyLearning Objective: 13-08 Describe the quantity discount model and solve typical problems.Stevenson - Chapter 13 #24Topic Area: How Much to Order: Economic Order Quantity Models

25. In the quantity discount model, if holding costs are given as a percentage of unit price, a graph of the total cost curves will have the same EOQ for each curve. FALSE

Total cost curves will differ across the price levels.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: HardLearning Objective: 13-08 Describe the quantity discount model and solve typical problems.Stevenson - Chapter 13 #25Topic Area: How Much to Order: Economic Order Quantity Models

26. In the quantity discount model, the optimum quantity will always be found on the lowest total cost curve. FALSE

The optimum quantity might actually be when the discount is passed up.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: HardLearning Objective: 13-08 Describe the quantity discount model and solve typical problems.Stevenson - Chapter 13 #26Topic Area: How Much to Order: Economic Order Quantity Models

27. ROP models indicate to managers the time between orders. FALSE

ROP models indicate when, with regard to on-hand inventory, orders should be placed.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: HardLearning Objective: 13-09 Describe reorder point models and solve typical problems.Stevenson - Chapter 13 #27Topic Area: Reorder Point Ordering

28. When to order can be calculated by the ROP and expressed as a quantity. TRUE

ROP models indicate when, with regard to on-hand inventory, orders should be placed.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: EasyLearning Objective: 13-09 Describe reorder point models and solve typical problems.Stevenson - Chapter 13 #28Topic Area: Reorder Point Ordering

29. The rate of demand is an important factor in determining the ROP. TRUE

The demand rate multiplied by the lead time is a major part of the ROP.


30. The inventory value of the supply chain exceeds the inventory value of the organization's work in process inventory. TRUE

There can be raw materials and finished goods inventory at the organization. Other organizations in the supply chain will have inventories, too.


31. Safety stock is held because we anticipate future demand. FALSE

Safety stock is held because we anticipate fluctuations in future demand or in lead time.


32. Variability in demand and/or lead time can be compensated for by safety stock. TRUE

Safety stock can be used to accommodate these.


33. Solving quality problems can lead to lower inventory levels. TRUE

Leaning out the organization can be facilitated by solving quality problems.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: MediumLearning Objective: 13-01 Define the term inventory; list the major reasons for holding inventories; and list the main requirements for effective inventory management.Stevenson - Chapter 13 #33Topic Area: Operations Strategy

34. ROP models assume that demand during lead time is composed of a series of dependent daily demands. FALSE

ROP models assume that demand during lead time is composed of a series of independent daily demands.


35. Profit margins tend to be inversely related to inventory turns. TRUE

This is typically the case.

AACSB: Reflective ThinkingBlooms: UnderstandDifficulty: MediumLearning Objective: 13-04 Explain the objectives of inventory management.Stevenson - Chapter 13 #35Topic Area: The Nature and Importance of Inventories

36. In the fixed-order interval model, the order size is the same for each order. FALSE

Order size varies from order to order in a fixed-order interval model.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: MediumLearning Objective: 13-03 Explain periodic and perpetual review systems.Stevenson - Chapter 13 #36Topic Area: How Much to Order: Fixed-Order-Interval Model

37. The fixed-order interval model requires a continuous monitoring of inventory levels. FALSE

The fixed-order interval model leads to periodic monitoring of inventory levels.


38. Discrete stocking levels are used when an organization doesn't want visibility of inventory levels. FALSE

Discrete stocking refers to having to stock a discrete number of units.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: MediumLearning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems.Stevenson - Chapter 13 #38Topic Area: The Single-Period Model

39. The fixed-order interval model requires a larger amount of safety stock than the ROP model for the same risk of a stockout. TRUE

Fixed-order intervals typically carry more safety stock.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: HardLearning Objective: 13-03 Explain periodic and perpetual review systems.Stevenson - Chapter 13 #39Topic Area: How Much to Order: Fixed-Order-Interval Model

40. The single-period model can be very helpful in determining when to order. FALSE

The single-period model helps determine how many to order.


41. The single-period model can be very helpful in determining how much to order. TRUE

The single-period model helps determine how many to order.


42. Monitoring inventory turns over time can be used as a measure of performance. TRUE

Greater turnover often implies better performance.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: MediumLearning Objective: 13-04 Explain the objectives of inventory management.Stevenson - Chapter 13 #42Topic Area: The Nature and Importance of Inventories

43. A single-period model would be used mainly by organizations going out of business. FALSE

The single-period model applies to many regularly occurring circumstances.


44. The basic EOQ model ignores the purchasing cost. TRUE

Only if quantity discounts are offered does purchasing cost enter into EOQ analysis.


45. When the item is offered for resale, shortage costs in the single-period model can include a charge for loss of customer goodwill. TRUE

Greater loss of goodwill would equate with a higher shortage cost.


46. In the single-period model, the service level is the probability that demand will not exceed the stocking level in any period. TRUE

If demand exceeds the stocking level, a stockout as occurred.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: EasyLearning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems.Stevenson - Chapter 13 #46Topic Area: The Single-Period Model

47. A quantity discount will lower the reorder point. FALSE

The reorder point is independent of quantity discounts.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: HardLearning Objective: 13-08 Describe the quantity discount model and solve typical problems.Learning Objective: 13-09 Describe reorder point models and solve typical problems.Stevenson - Chapter 13 #47Topic Area: How Much to Order: Economic Order Quantity ModelsTopic Area: Reorder Point Ordering

48. It is critical that the exact quantity calculated in the EOQ model be ordered. FALSE

Because the total cost curve is flat, modest rounding of the EOQ is permissible.


49. Safety stock eliminates all stock outs. FALSE

Safety stock only ensures that a given likelihood of stock outs.


50. The calculation of safety stock requires knowledge of demand and lead time variability. TRUE

Both of these play a role in the calculation of safety stock.


51. The two basic issues in inventory are how much to order and when to order. TRUE

Quantity and timing are the two basic issues in inventory management.


52. Cycle counting can be used in motorcycle inventory control. TRUE

Cycle counting can also be used in automobile inventory control.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: MediumLearning Objective: 13-01 Define the term inventory; list the major reasons for holding inventories; and list the main requirements for effective inventory management.Stevenson - Chapter 13 #52Topic Area: Requirements for Effective Inventory Management

53. Using the EOQ model, the higher an item's carrying costs, the more frequently it will be ordered. TRUE

As carrying costs increase, the optimal order quantity decreases.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: HardLearning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems.Stevenson - Chapter 13 #53Topic Area: How Much to Order: Economic Order Quantity Models

54. The cycle time represents the time between reorder point and receipt of order. FALSE

The cycle time represents the time between orders.


55. The cost of placing an order is a function of order size. FALSE

The cost of placing an order is typically unrelated to order size.


56. All stock outs must be avoided. FALSE

Most of the time it would be too costly to avoid all stockouts.


57. In the basic EOQ model, annual holding cost is one-half of the total annual cost for all items purchased. FALSE

Annual holding cost equals half the product of the order quantity and the per-unit-per-year holding cost.


58. Quantity discounts are generally given for large number of orders. FALSE

Quantity discounts are given for smaller, but larger, orders.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: EasyLearning Objective: 13-08 Describe the quantity discount model and solve typical problems.Stevenson - Chapter 13 #58Topic Area: How Much to Order: Economic Order Quantity Models

59. The larger the number of orders placed, the larger the average level of inventory. FALSE

More orders means smaller quantities, which means lower average inventory.


60. Which of the following is not one of the assumptions of the basic EOQ model? A. Annual demand requirements are known and constant.B. Lead time does not vary.C. Each order is received in a single delivery.D. Quantity discounts are available.E. All of the above are necessary assumptions.

In the basic EOQ model quantity discounts are not available.


61. Which of the following interactions with vendors would potentially lead to inventory reductions? A. reduce lead timesB. increase safety stockC. less frequent purchasesD. larger batch quantitiesE. longer order intervals

Reducing lead times would have the effect of reducing safety stock requirements and therefore reducing inventories.

AACSB: Reflective ThinkingBlooms: UnderstandDifficulty: HardLearning Objective: 13-01 Define the term inventory; list the major reasons for holding inventories; and list the main requirements for effective inventory management.Stevenson - Chapter 13 #61Topic Area: Operations Strategy

62. A non-linear cost related to order size is the cost of: A. interestB. insuranceC. taxesD. receivingE. space

Receiving cost is a non-linear cost associated with order size.

AACSB: Reflective ThinkingBlooms: UnderstandDifficulty: HardLearning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems.Stevenson - Chapter 13 #62Topic Area: How Much to Order: Economic Order Quantity Models

63. In a two-bin inventory system, the amount contained in the second bin is equal to the: A. ROPB. EOQC. amount in the first binD. optimum stocking levelE. safety stock

The second bin equals the amount needed during lead time in addition to any safety stock.


64. When carrying costs are stated as a percentage of unit price, the minimum points on the total cost curves: A. Line upB. Equal zeroC. Do not line upD. Cannot be calculatedE. Depend on the percentage assigned

Curves aren't symmetrical if holding cost differs across price breaks.

AACSB: Reflective ThinkingBlooms: UnderstandDifficulty: HardLearning Objective: 13-08 Describe the quantity discount model and solve typical problems.Stevenson - Chapter 13 #64Topic Area: How Much to Order: Economic Order Quantity Models

65. Dairy items, fresh fruit and newspapers are items that: A. do not require safety stocksB. cannot be ordered in large quantitiesC. are subject to deterioration and spoilageD. require that prices be lowered every two daysE. have minimal holding costs

Deterioration and spoilage increase holding costs.


66. Which of the following is least likely to be included in order costs? A. processing vendor invoices for paymentB. moving delivered goods to temporary storageC. inspecting incoming goods for quantityD. taking an inventory to determine how much is neededE. temporary storage of delivered goods

Storage costs are holding costs.


67. In an A-B-C system, the typical percentage of the number of items in inventory for A items is about: A. 10B. 30C. 50D. 70E. 90

Class A items represent a relatively small portion of items.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: EasyLearning Objective: 13-05 Describe the A-B-C approach and explain how it is useful.Stevenson - Chapter 13 #67Topic Area: Requirements for Effective Inventory Management

68. In the A-B-C classification system, items which account for fifteen percent of the total dollar-volume for a majority of the inventory items would be classified as: A. A itemsB. B itemsC. C itemsD. A items plus B itemsE. B items plus C items

These would be class C items.


69. In the A-B-C classification system, items which account for sixty percent of the total dollar-volume for few inventory items would be classified as: A. A itemsB. B itemsC. C itemsD. A items plus B itemsE. B items plus C items

These would be class A items.


70. The purpose of "cycle counting" is to: A. count all the items in inventoryB. count bicycles and motorcycles in inventoryC. reduce discrepancies between inventory records and actualD. reduce theftE. count 10% of the items each month

Cycle counting is intended to improve inventory record accuracy.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: EasyLearning Objective: 13-04 Explain the objectives of inventory management.Stevenson - Chapter 13 #70Topic Area: Requirements for Effective Inventory Management

71. The EOQ model is most relevant for which one of the following? A. ordering items with dependent demandB. determination of safety stockC. ordering perishable itemsD. determining fixed interval order quantitiesE. determining fixed order quantities

The EOQ is a fixed-quantity approach.

AACSB: Reflective ThinkingBlooms: UnderstandDifficulty: MediumLearning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems.Stevenson - Chapter 13 #71Topic Area: How Much to Order: Economic Order Quantity Models

72. Which is not a true assumption in the EOQ model? A. Production rate is constantB. Lead time doesn't varyC. No more than 3 items are involvedD. Usage rate is constantE. No quantity discounts

EOQ can be used across multiple items.


73. In a supermarket, a vendor's restocking the shelves every Monday morning is an example of: A. safety stock replenishmentB. economic order quantitiesC. reorder pointsD. fixed order intervalE. blanket ordering

This would be a weekly interval model.


74. A cycle count program will usually require that ‘A' items be counted: A. daily.B. once a week.C. monthly.D. quarterly.E. more frequently than annually.

Class A items are counted more frequently.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: HardLearning Objective: 13-05 Describe the A-B-C approach and explain how it is useful.Stevenson - Chapter 13 #74Topic Area: Requirements for Effective Inventory Management

75. A risk avoider would want ______ safety stock. A. LessB. MoreC. The sameD. ZeroE. 50%

Greater risk aversion is associated with more safety stock.

AACSB: Reflective ThinkingBlooms: UnderstandDifficulty: EasyLearning Objective: 13-09 Describe reorder point models and solve typical problems.Stevenson - Chapter 13 #75Topic Area: Reorder Point Ordering

76. In the basic EOQ model, if annual demand doubles, the effect on the EOQ is: A. It doubles.B. It is four times its previous amount.C. It is half its previous amount.D. It is about 70 percent of its previous amount.E. It increases by about 40 percent.

The EOQ does not increase linearly with demand.

AACSB: Reflective ThinkingBlooms: UnderstandDifficulty: HardLearning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems.Stevenson - Chapter 13 #76Topic Area: How Much to Order: Economic Order Quantity Models

77. In the basic EOQ model, if lead time increases from five to 10 days, the EOQ will: A. doubleB. increase, but not doubleC. decrease by a factor of twoD. remain the sameE. none of the above

The EOQ is independent of lead time.


78. In the basic EOQ model, an annual demand of 40 units, an ordering cost of $5, and a holding cost of $1 per unit per year will result in an EOQ of: A. 20B. square root of 200C. 200D. 400E. none of these

Use the base EOQ formula.

AACSB: AnalyticBlooms: ApplyDifficulty: MediumLearning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems.Stevenson - Chapter 13 #78Topic Area: How Much to Order: Economic Order Quantity Models

79. In the basic EOQ model, if D = 60 per month, S = $12, and H = $10 per unit per month, EOQ is: A. 10B. 12C. 24D. 72E. 144



80. In the basic EOQ model, if annual demand is 50, carrying cost is $2, and ordering cost is $15, EOQ is approximately: A. 11B. 20C. 24D. 28E. 375



81. Which of the following is not true for Economic Production Quantity model? A. Usage rate is constant.B. Production rate exceeds usage rate.C. Run size exceeds maximum inventory.D. There are no ordering or setup costs.E. Average inventory is one-half maximum inventory.

There are ordering or setup costs in the EPQ model.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: MediumLearning Objective: 13-07 Describe the economic production quantity model and solve typical problems.Stevenson - Chapter 13 #81Topic Area: How Much to Order: Economic Order Quantity Models

82. Given the same demand, setup/ordering costs, and carrying costs, the EOQ calculated using incremental replenishment will be ____________ if instantaneous replenishment was assumed: A. greater than the EOQB. equal to the EOQC. smaller than the EOQD. greater than or equal to the EOQE. smaller than or equal to the EOQ

The EPQ will be smaller than the EOQ.

AACSB: Reflective ThinkingBlooms: UnderstandDifficulty: MediumLearning Objective: 13-07 Describe the economic production quantity model and solve typical problems.Stevenson - Chapter 13 #82Topic Area: How Much to Order: Economic Order Quantity Models

83. The introduction of quantity discounts will cause the optimum order quantity to be: A. smallerB. unchangedC. greaterD. smaller or unchangedE. unchanged or greater

Quantity discounts cannot make the optimum quantity be smaller.


84. A fill rate is the percentage of _____ filled by stock on hand. A. ShipmentsB. DemandC. InventoryD. Safety stockE. Lead time

The fill rate is the percentage of demand filled directly from on-hand inventory.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: MediumLearning Objective: 13-09 Describe reorder point models and solve typical problems.Stevenson - Chapter 13 #84Topic Area: How Much to Order: Fixed-Order-Interval Model

85. In the quantity discount model, with carrying cost stated as a percentage of unit purchase price, in order for the EOQ of the lowest curve to be optimum, it must: A. have the lowest total costB. be in a feasible rangeC. be to the left of the price break quantity for that priceD. have the largest quantity compared to other EOQ'sE. none of the above

If not feasible, that quantity will have to be adjusted upward and then total cost calculated.


86. Which one of the following is not generally a determinant of the reorder point? A. rate of demandB. length of lead timeC. lead time variabilityD. stockout riskE. purchase cost

Purchase cost does not enter into reorder point calculations.


87. If no variations in demand or lead time exist, the ROP will equal: A. the EOQB. expected usage during lead timeC. safety stockD. the service levelE. the EOQ plus safety stock

The ROP will be the demand rate times the lead time.


88. If average demand for an inventory item is 200 units per day, lead time is three days, and safety stock is 100 units, the reorder point is: A. 100 unitsB. 200 unitsC. 300 unitsD. 600 unitsE. 700 units

The ROP will be the safety stock added to the product of the demand rate and the lead time.

AACSB: AnalyticBlooms: ApplyDifficulty: EasyLearning Objective: 13-09 Describe reorder point models and solve typical problems.Stevenson - Chapter 13 #88Topic Area: Reorder Point Ordering

89. Which one of the following is implied by a "lead time" service level of 95 percent? A. Approximately 95 percent of demand during lead time will be satisfied.B. Approximately 95 percent of inventory will be used during lead time.C. The probability is 95 percent that demand during lead time will exactly equal the amount on hand at the beginning of lead time.D. The probability is 95 percent that demand during lead time will not exceed the amount on hand at the beginning of lead time.E. none of the above

A stock only occurs if demand during lead time exceeds the ROP.

AACSB: Reflective ThinkingBlooms: UnderstandDifficulty: HardLearning Objective: 13-09 Describe reorder point models and solve typical problems.Stevenson - Chapter 13 #89Topic Area: Reorder Point Ordering

90. Which one of the following is implied by an "annual" service level of 95 percent? A. Approximately 95 percent of demand during lead time will be satisfied.B. The probability is 95 percent that demand will exceed supply during lead time.C. The probability is 95 percent that demand will equal supply during lead time.D. The probability is 95 percent that demand will not exceed supply during lead time.E. None of the above.

The annual service level is usually greater than the cycle service level, and thus the risk of a stockout during lead time is much smaller than 5 percent.


91. Daily usage is exactly 60 gallons per day. Lead time is normally distributed with a mean of 10 days and a standard deviation of 2 days. What is the standard deviation of demand during lead time? A. 60 x 2B. 60 times the square root of 2C. 60 times the square root of 10D. 60 x 10E. none of the above

The standard deviation of demand during lead time is the square root of squared demand times the squared standard deviation of lead time.

AACSB: AnalyticBlooms: ApplyDifficulty: HardLearning Objective: 13-09 Describe reorder point models and solve typical problems.Stevenson - Chapter 13 #91Topic Area: Reorder Point Ordering

92. Lead time is exactly 20 days long. Daily demand is normally distributed with a mean of 10 gallons per day and a standard deviation of 2 gallons. What is the standard deviation of demand during lead time? A. 20 x 2B. 20 x 10C. 2 times the square root of 20D. 2 times the square root of 10E. none of the above

The standard deviation of demand during lead time equals the daily standard deviation of demand times the square root of the lead time.


93. All of the following are possible reasons for using the fixed order interval model except: A. Supplier policy encourages use.B. Grouping orders can save in shipping costs.C. The required safety stock is lower than with an EOQ/ROP model.D. It is suited to periodic checks of inventory levels rather than continuous monitoring.E. Continuous monitoring is not practical.

Safety stock is higher in a fixed order interval model.

AACSB: Reflective ThinkingBlooms: UnderstandDifficulty: MediumLearning Objective: 13-03 Explain periodic and perpetual review systems.Stevenson - Chapter 13 #93Topic Area: How Much to Order: Fixed-Order-Interval Model

94. Which of these products would be most apt to involve the use of a single-period model? A. gold coinsB. hammersC. fresh fishD. calculatorsE. frozen corn

The perishability of fresh fish makes it more appropriate for a single-period model.

AACSB: Reflective ThinkingBlooms: UnderstandDifficulty: EasyLearning Objective: 13-10 Describe situations in which the singleperiod model would be appropriate; and solve typical problems.Stevenson - Chapter 13 #94Topic Area: The Single-Period Model

95. In a single-period model, if shortage and excess costs are equal, then the optimum service level is: A. 0B. .33C. .50D. .67E. none of these

The ratio of shortage cost to shortage plus excess cost is 0.5.

AACSB: AnalyticBlooms: ApplyDifficulty: MediumLearning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems.Stevenson - Chapter 13 #95Topic Area: The Single-Period Model

96. In a single-period model, if shortage cost is four times excess cost, then the optimum service level is ___ percent. A. 100B. 80C. 60D. 40E. 20



97. In the single-period model, if excess cost is double shortage cost, the approximate stockout risk, assuming an optimum service level, is ___ percent. A. 100B. 67C. 50D. 33E. 5


AACSB: AnalyticBlooms: ApplyDifficulty: HardLearning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems.Stevenson - Chapter 13 #97Topic Area: The Single-Period Model

98. If, in a single-period inventory situation, the probabilities of demand being 1, 2, 3, or 4 units are .3, .3, .2, and .2, respectively. If two units are stocked, what is the probability of selling both of them? A. .5B. .6C. .7D. .8E. none of these

Both units will be sold if demand is for 2, 3 or 4 units.


99. The management of supply chain inventories focuses on: A. internal inventoriesB. external inventoriesC. both internal and external inventoriesD. safety stock eliminationE. optimizing reorder points

Supply chain inventory involves both internal and external inventories.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: MediumLearning Objective: 13-01 Define the term inventory; list the major reasons for holding inventories; and list the main requirements for effective inventory management.Stevenson - Chapter 13 #99Topic Area: Operations Strategy

100. An operations strategy for inventory management should work towards: A. increasing lot sizesB. decreasing lot sizesC. increasing safety stocksD. decreasing service levelsE. increasing order quantities

If lot sizes can be reduced, operations become leaner.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: EasyLearning Objective: 13-04 Explain the objectives of inventory management.Stevenson - Chapter 13 #100Topic Area: Operations Strategy

101. Cycle stock inventory is intended to deal with ________. A. excess costsB. shortage costsC. stockoutsD. expected demandE. quantity discounts

Cycle stock is intended to deal with expected demand, while safety stock is intended to reduce stockouts resulting from demand uncertainty.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: MediumLearning Objective: 13-01 Define the term inventory; list the major reasons for holding inventories; and list the main requirements for effective inventory management.Stevenson - Chapter 13 #101Topic Area: Inventory Ordering Policies

102. An operations strategy which recognizes high carrying costs and reduces ordering costs will result in: A. unchanged order quantitiesB. slightly decreased order quantitiesC. greatly decreased order quantitiesD. slightly increased order quantitiesE. greatly increased order quantities

Processes will be leaned leading to smaller order quantities.

AACSB: Reflective ThinkingBlooms: RememberDifficulty: MediumLearning Objective: 13-04 Explain the objectives of inventory management.Stevenson - Chapter 13 #102Topic Area: Operations Strategy

103. The need for safety stocks can be reduced by an operations strategy which: A. increases lead timeB. increases lead time variabilityC. increases lot sizesD. decreases ordering costsE. decreases lead time variability

Reduced lead time variability will reduce the size of safety stocks.

AACSB: Reflective ThinkingBlooms: UnderstandDifficulty: MediumLearning Objective: 13-09 Describe reorder point models and solve typical problems.Stevenson - Chapter 13 #103Topic Area: Operations Strategy

104. If average demand for an item is 20 units per day, safety stock is 50 units, and lead time is four days, the ROP will be: A. 20B. 50C. 70D. 80E. 130

Multiply the demand rate by the lead time and add the safety stock.

AACSB: AnalyticBlooms: ApplyDifficulty: MediumLearning Objective: 13-09 Describe reorder point models and solve typical problems.Stevenson - Chapter 13 #104Topic Area: Reorder Point Ordering

105. With an A-B-C system, an item that had a high demand but a low annual dollar volume would probably be classified as: A. AB. BC. CD. none of these

Low dollar volume items tend to be classified as C items.


106. The fixed order interval model would be most likely to be used for this situation: A. A company has switched from mass production to lean production.B. Production is done in batches.C. Spare parts are ordered when a new machine is purchased.D. Grouping orders can save shipping costs.E. none of these

If ordering costs can be saved by grouping orders, the fixed order interval model is especially attractive.

AACSB: Reflective ThinkingBlooms: UnderstandDifficulty: HardLearning Objective: 13-03 Explain periodic and perpetual review systems.Stevenson - Chapter 13 #106Topic Area: How Much to Order: Fixed-Order-Interval Model

107. Which item would be least likely to be ordered under a fixed order interval system? A. textbooks at a college bookstoreB. auto parts at an assembly plantC. cards at a gift shopD. canned peas at a supermarketE. none of these

Auto parts at an assembly plant would be unlikely candidates for a fixed order interval system.

AACSB: Reflective ThinkingBlooms: UnderstandDifficulty: MediumLearning Objective: 13-03 Explain periodic and perpetual review systems.Stevenson - Chapter 13 #107Topic Area: How Much to Order: Fixed-Order-Interval Model

108. Which one of these would not be a factor in determining the reorder point? A. the EOQB. the lead timeC. the variability of demandD. the demand or usage rateE. all are factors

The ROP is independent of the EOQ.


109. A car rental agency uses 96 boxes of staples a year. The boxes cost $4 each. It costs $10 to order staples, and carrying costs are $0.80 per box on an annual basis.Determine:(A) the order quantity that will minimize the sum of ordering and holding boxes of staples(B) the annual cost of ordering and carrying the boxes of staples

D = 96 boxes/yearS = $10H = $.80 per box-year

Feedback: Use the EOQ and the total annual cost formula.


110. A service garage uses 120 boxes of cleaning cloths a year. The boxes cost $6 each. Ordering cost is $3 and holding cost is 10 percent of purchase cost per unit on an annual basis.Determine:(A) The economic order quantity(B) The total cost of carrying the cloths (excluding purchase price)(C) The average inventory

D = 120 boxes per yearS = $3H = .10($6) = $.60 per box-year

A)

B)

C)

Feedback: Use the EOQ, total annual cost and average inventory formulas.


111. A shop that makes candles offers a scented candle, which has a monthly demand of 360 boxes. Candles can be produced at a rate of 36 boxes per day. The shop operates 20 days a month. Assume that demand is uniform throughout the month. Setup cost is $60 for a run, and holding cost is $2 per box on a monthly basis.Determine the following:(A) the economic run size(B) the maximum inventory(C) the number of days in a run

The daily usage rate (u) is 18 boxes. The daily production rate (p) is 36 boxes.

A)

B)

C)

Feedback: Use the EPQ and Imax formulas. Days per run is the EPQ divided by the production rate.

AACSB: AnalyticBlooms: ApplyDifficulty: MediumLearning Objective: 13-07 Describe the economic production quantity model and solve typical problems.Stevenson - Chapter 13 #111Topic Area: How Much to Order: Economic Order Quantity Models

112. Estimated demand for gold-filled lockets at Sam's Bargain Jewelry and Housewares is 2,420 lockets a year. Manager Veronica Winters has indicated that ordering cost is $45, and that the following price schedule applies: 1 to 599 lockets, $.90 each; 600 to 1,199 lockets, $.80 each; and 1,200 or more, $.75 each. What order size will minimize total cost if carrying cost is $.18 per locket on an annual basis?

D = 2,420 lockets per yearS = $45H = $.18 per locket

Hence, the most attractive order quantity is 1,200 units.

Feedback: Since the first calculated quantity is in the range of feasibility for $.80 per unit, compare the total cost of 1,100 @ $.80 each with the total cost of 1,200 @ $.75 each.

AACSB: AnalyticBlooms: ApplyDifficulty: MediumLearning Objective: 13-08 Describe the quantity discount model and solve typical problems.Stevenson - Chapter 13 #112Topic Area: How Much to Order: Economic Order Quantity Models

113. Suppose that you are the manager of a production department that uses 400 boxes of rivets per year. The supplier quotes you a price of $8.50 per box for an order size of 199 boxes or less, a price of $8.00 per box for orders of 200 to 999 boxes, and a price of $7.50 per box for an order of 1,000 or more boxes. You assign a holding cost of 20 percent of the price to this inventory. What order quantity would you use if the objective is to minimize total annual costs of holding, purchasing, and ordering? Assume ordering cost is $80/order.

D = 400 boxes per yearS = $80H = .20P

Thus, the best choice is to buy 200 per order at a price of $8.00 per unit.

Feedback: The lowest curve with its minimum in the feasible range is $8.00, where Q = 200. Hence, compare the total cost of 200 @ $8.00 each and the total cost of 1,000 @ $7.50 each.


114. The operator of a concession at a downtown location estimates that he will sell 400 bags of circus peanuts during a month. Carrying costs are 17 percent of unit price and ordering cost is $22. The price schedule for bags of peanuts is: 1 to 199, $1.00 each; 200 to 499, $.94 each; and 500 or more $.87 each. What order size would be most economical?

D = 400 bags per yearS = $22H = .17P

Thus, the best choice is to buy 500 per order at a price of $.87 per unit.

Feedback: The lowest curve with a feasible EOQ is the $.94 curve. Hence, compare total cost of 332 bags @ $.94 each with the total cost of 500 @ $.87 each.


115. A dry cleaning firm uses an average of 20 gallons of cleaning fluid a day. Usage tends to be normally distributed with a standard deviation of two gallons per day. Lead time is four days, and the desired service level is 92 percent. What amount of safety stock is appropriate if a fixed order size of 600 gallons is used?

= 20 gallons per day; = 2 gallons per dayLT = 4 daysSL = 92 percent (Z = 1.41)

Feedback: Multiply an appropriate Z-value by the standard deviation of demand and the square root of the lead time.


116. Suppose that usage of cooking oil at Harry's Fish Fry is normally distributed with an average of 15 gallons/day and a standard deviation of two gallons/day. Harry has just fired the manager and taken over operating the restaurant himself. Harry has asked you to help him decide how to reorder cooking oil in order to achieve a service level which is seven times the risk of stockout (7/8). Lead time is eight days. Assume that cooking oil can be ordered as needed.

= 15 gallons per day; = 2 gallons per dayLT = 8 daysSL = 7/8 = 87.5 percent (Z = 1.15)For the continuous review system, the correct reorder point should be:

Feedback: Use the basic ROP formula.


117. A bakery's use of corn sweetener is normally distributed with a mean of 80 gallons per day and a standard deviation of four gallons per day. Lead time for delivery of the corn sweetener is normal with a mean of six days and a standard deviation of two days. If the manager wants a service level of 99 percent, what reorder point should be used?

For a 99 percent service level, the appropriate z-value is 2.33. Given this, the reorder point should be:



118. A manager reorders lubricant when the amount on-hand reaches 422 pounds. Average daily usage is 45 pounds, which is normally distributed with a standard deviation of three pounds per day. Lead time is nine days. What is the risk of a stockout?

= 45 lbs. per day; = 3 lbs. per day; LT = 9 days

If the ROP is 422, this means the safety stock is equal to 17 units.

If the safety stock equals 17 units, then solving for z, we get A z-value of 1.89 implies that the probability of a stockout is .0294, so the risk of a stockout is about 3 percent.

Feedback: Given the reorder point, solve for Z, then interpret the probability associated with that Z.


119. Given the following information:Order quantity = 300; = 20 units; desired lead time service level = .86.Find:(A) the expected number of units short per cycle(B) the annual service level

A) E(n) = E(z) ; for a lead time service level of .8599, E(z) = .071.Thus, E(n) = .071(20 units) = 1.42.

B) 1 - SLannual = = .0047Solving for SLannual, we get SLannual = 1 - .0047 = .9953 or 99.53%

Feedback: Use cycle and annual service level approaches.


120. A company can produce a part it uses in an assembly operation at the rate of 50 an hour. The company operates eight hours a day, 300 days a year. Daily usage of the part is 300 parts. The company uses the part every day. The run size is 6,000 parts. The annual holding cost is $2 per unit, and setup cost is $100.(A) How many runs per year will there be?(B) While production is occurring, how many parts per day are being added to inventory?(C) Assuming that production begins when there are no parts on hand, what is the maximum number of parts in inventory?(D) The machine is dedicated to this product. Every so often, preventive maintenance, which requires six working days, must be performed on it. Does this interrupt production cycles, or is there enough time between cycles to perform the maintenance? Explain.

(A) Annual demand = (300 parts/day) x (300 days/yr.) = 90,000 parts/yr.Annual demand/Run quantity = 90000/6000 = 15 runs/yr.(B) Inventory buildup = p - u = 400 - 300 = 100 parts/day.(C) Production takes 15 days: 6000 parts/400 parts/day = 15 days.Buildup is 100 parts/day x 15 days = 1500 parts.(D) Usage is 300 parts/day for 6 days = 1800 parts, but maximum inventory is only 1500 parts. Yes, it would interrupt production.

Feedback: Use EPQ formulas and interpret.

AACSB: AnalyticBlooms: ApplyDifficulty: HardLearning Objective: 13-07 Describe the economic production quantity model and solve typical problems.Stevenson - Chapter 13 #120Topic Area: How Much to Order: Economic Order Quantity Models

121. The injection molding department of a company uses 40 pounds of a powder a day. Inventory is reordered when the amount on hand is 240 pounds. Lead time averages five days. It is normally distributed and has a standard deviation of two days. What is the probability of a stockout during lead time?

= 5 days; = 2As on average 200 pounds are needed during lead time, a ROP of 240 pounds implies a safety stock of 40

pounds. With , the z-value is 0.5. This implies a probability of a stockout of .3085.

Feedback: Solve for Z, and then find the cumulative probability associated with that Z.


122. A shop owner uses a reorder point approach to restocking a certain raw material. Lead time is six days. Usage of the material during lead time is normally distributed with a mean of 42 pounds and a standard deviation of 4 pounds. When should the raw material be reordered if the acceptable risk of a stockout is 3%?

LT = 6 daysExpected demand during lead time = 42 poundsStandard deviation of lead-time demand = 4 poundsz = 1.88 for SL of 1.00 - .03ROP = expected demand during lead time + z = 252 + 1.88(4) = 259.52 pounds.



123. The manager of a bakery orders three 'cake-to-go' wedding cakes every Saturday to accommodate last minute purchases. Demand for the cakes can be described by a Poisson distribution that has a mean of 2. The cakes cost $10 each to prepare, and they sell for $26 each. Any cakes that haven't been sold by the end of the day are sold for half price the next day. Usually, half of those are sold and the rest are tossed. What stocking level would be appropriate?

Cs = $26 - $10 = $16Ce = $10 - .5($13) = $3.50

SL = = .82For Poisson with mean = 2.0, this falls between .677 and .857.Therefore, stock 3 cakes.

Feedback: Stock until the cumulative probability of demand first exceeds this ratio.

AACSB: AnalyticBlooms: ApplyDifficulty: HardLearning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems.Stevenson - Chapter 13 #123Topic Area: Operations Strategy

124. A manager has just received a revised price schedule from a vendor. What order quantity should the manager use in order to minimize total costs? Annual Demand is 120 units, ordering cost is $8, and annual carrying cost is $1 per unit.

Because this is in the 40-59 range, compare TC of Q = 44 @ $13, Q = 60 @ $12, and Q = 90 @ $11:

Feedback: The EOQ for the 40-59 range is the lowest feasible EOQ. Compare this quantity's total cost to the total cost of minimum quantities in the lower price ranges.


A manufacturer is contemplating a switch from buying to producing a certain item. Setup cost would be the same as ordering cost. The production rate would be about double the usage rate.

Stevenson - Chapter 13

125. Compared to the EOQ, the economic production quantity would be approximately: A. the sameB. 20 percent largerC. 40 percent largerD. 20 percent smallerE. 40 percent smaller

The EPQ will be larger than the EOQ.

AACSB: Reflective ThinkingBlooms: UnderstandDifficulty: HardLearning Objective: 13-07 Describe the economic production quantity model and solve typical problems.Stevenson - Chapter 13 #125Topic Area: How Much to Order: Economic Order Quantity Models

126. Compared to the EOQ, the maximum inventory would be approximately: A. 70 percent higherB. 30 percent higherC. the sameD. 30 percent lowerE. 70 percent lower

Maximum inventory is smaller under an EPQ than an EOQ.

AACSB: Reflective ThinkingBlooms: UnderstandDifficulty: HardLearning Objective: 13-07 Describe the economic production quantity model and solve typical problems.Stevenson - Chapter 13 #126Topic Area: How Much to Order: Economic Order Quantity Models

The manager of the Quick Stop Corner Convenience Store (which never closes) sells four cases of Stein beer each day. Order costs are $8.00 per order, and Stein beer costs $.80 per six-pack (each case of Stein beer contains four six-packs). Orders arrive three days from the time they are placed. Daily holding costs are equal to five percent of the cost of the beer.


127. At what point should he reorder Stein beer? A. 0 cases remainingB. 4 cases remainingC. 12 cases remainingD. 16 cases remainingE. 20 cases remaining

Use the basic reorder point with no demand uncertainty.


128. If he were to order 16 cases of Stein beer at a time, what would be the length of an order cycle? A. 0.25 daysB. 3 daysC. 1 dayD. 4 daysE. 20 days

Divide the order quantity by the demand rate to get the length of an order cycle.


129. If he were to order 16 cases of Stein beer at a time, what would be the average inventory level? A. 4 casesB. 12 casesC. 8 casesD. 20 casesE. 16 cases

Divide the order quantity by two.


130. If he were to order 16 cases of Stein beer at a time, what would be the daily total inventory costs, EXCLUDING the cost of the beer? A. $2.00B. $4.00C. $1.28D. $3.28E. $2.56

Multiply the average inventory by the holding cost.


131. What is the economic order quantity for Stein beer? A. 8 casesB. 11 casesC. 14 casesD. 20 casesE. 32 cases

Use the basic EOQ formula.


Ann Chovies, owner of the Perfect Pasta Pizza Parlor, uses 20 pounds of pepperoni each day in preparing pizzas. Order costs for pepperoni are $10.00 per order, and carrying costs are 4 cents per pound per day. Lead time for each order is 3 days, and the pepperoni itself costs $3.00 per pound.


132. At what point should she reorder pepperoni? A. 20 pounds remainingB. 40 pounds remainingC. 60 pounds remainingD. 80 pounds remainingE. 100 pounds remaining

Multiply the demand rate by the lead time.


133. If she were to order 80 pounds of pepperoni at a time, what would be the length of an order cycle? A. 0 daysB. 0.25 daysC. 3 daysD. 4 daysE. 5 days

Divide the order quantity by the demand rate.


134. If she were to order 80 pounds of pepperoni at a time, what would be the average inventory level? A. 20 poundsB. 40 poundsC. 60 poundsD. 80 poundsE. 100 pounds



135. If she were to order 80 pounds of pepperoni at a time, what would be the total daily costs, including the cost of the pepperoni? A. $60.00B. $63.20C. $64.00D. $64.10E. $65.00

Add the holding cost to the ordering cost and the cost of the pepperoni.


136. What is the economic order quantity for pepperoni? A. 20 poundsB. 40 poundsC. 60 poundsD. 80 poundsE. 100 pounds



The Operations Manager for Shadyside Savings & Loan orders cash from her home office for her very popular "BIG BUCKS" automated teller machine, which only dispenses $100 bills. She estimates that this machine dispenses an average of 12,500 bills per month, and that carrying a bill in inventory costs 10 percent of its value annually. She knows that each order for these bills costs $300 for clerical and armored car delivery costs, and that order lead time is six days.


137. Assuming a thirty-day month, at what point should bills be reordered? A. 0 bills remainingB. 417 bills remainingC. 2,500 bills remainingD. 10,000 bills remainingE. 12,500 bills remaining



138. Assuming a thirty-day month, if she were to order 6,000 bills at a time, what would be the length of an order cycle? A. 0.48 daysB. 2.08 daysC. 6 daysD. 8.4 daysE. 14.4 days



139. If she were to order 6,000 bills at a time, what would be the dollar value of the average inventory level? A. $3,000B. $6,000C. $12,500D. $300,000E. $600,000



140. If she were to order 6,000 bills at a time, what would be the average monthly total costs, EXCLUDING the value of the bills? A. $625B. $1,250C. $2,500D. $3,125E. $37,500

Add the ordering and holding costs.


141. What is the economic order quantity? A. 600 billsB. 3,000 billsC. 949 billsD. 6,215 billsE. 12,500 bills



Given the following data for a particular inventory item:


142. What is the economic order quantity for this item?

2,000 units

Feedback: Use the basic EOQ formula.


143. For the economic order quantity, what is the length of an order cycle?

4 weeks

Feedback: Divide the order quantity by the demand rate.


144. For the economic order quantity, what is the reorder point?

1,500 units

Feedback: Multiply the lead time by the demand rate.


145. For the economic order quantity, what is the average inventory level?

1,000 units

Feedback: Divide the order quantity by two.


146. For the economic order quantity, what are average weekly ordering costs?

$10

Feedback: Divide the demand rate by the order quantity, then multiply by per-order cost.


147. For the economic order quantity, what are average weekly carrying costs?

$10

Feedback: Divide the order quantity by two, then multiply by the periodic holding cost.


148. For the economic order quantity, what are average weekly total costs, including the cost of the inventory item?

$270

Feedback: Multiply the demand rate by the cost of the item, then add to the holding and ordering costs.


The materials manager for a billiard ball maker must periodically place orders for resin, one of the raw materials used in producing billiard balls. She knows that manufacturing uses resin at a rate of 50 kilograms each day, and that it costs $.04 per day to carry a kilogram of resin in inventory. She also knows that the order costs for resin are $100 per order, and that the lead time for delivery is four (4) days.


149. At what point should resin be reordered? A. 0 kilograms remainingB. 50 kilograms remainingC. 200 kilograms remainingD. 400 kilograms remainingE. 500 kilograms remaining



150. If order size was 1,000 kilograms of resin, what would be the length of an order cycle? A. 0.05 daysB. 4 daysC. 16 daysD. 20 daysE. 50 days



151. If the order size was 1,000 kilograms of resin, what would be the average inventory level? A. 50 kilogramsB. 200 kilogramsC. 500 kilogramsD. 800 kilogramsE. 1,000 kilograms



152. If the order size was 1,000 kilograms of resin, what would be the daily total inventory costs, EXCLUDING the cost of the resin? A. $5B. $10C. $20D. $25E. $40

Multiply the average inventory by the holding cost.


153. What is the economic order quantity for resin? A. 50 kilogramsB. 100 kilogramsC. 250 kilogramsD. 500 kilogramsE. 1,000 kilograms



154. A firm stocks a seasonal item that it buys for $22/unit and sells for $29 unit. During the season, daily demand can be described using a Poisson distribution with a mean of 2.4. Because of the nature of the item, units remaining at the close of business each day must be removed at a cost of $2 each. What is the optimum stocking level, and what is the effective service level?

Cs = $29 - $22 = $7Ce = $22 + $2 = $24

For a Poisson distributed variable with a mean of 2.4, this SL falls between the cumulative probabilities associated with levels of 0 and 1 unit. Hence, stock 1 unit.

Feedback: At that stocking level, the (effective) service level is .308.


155. Joe's Coffee Shoppe has fresh doughnuts delivered each morning. Daily demand for plain doughnuts is approximately normal with a mean of 200 and a standard deviation of 15. Joe pays $1.20 per dozen and has a standing order for 16 dozen. Joe and the staff eat any leftovers. What is the implied shortage cost?

= 15Ce = $1.20 per dozenThe stocking level is 12(16) = 192, which implies a service level of .2981.

If .2981 = and Ce $1.20 per dozen, solving for Cs leads to an estimated Cs of $.51 per dozen.

Feedback: Given the implied service level and the excess cost, solve for the implied shortage cost.


156. A restaurant prepares Peking Duck daily at a cost of $18 per duck. Each duck generates revenue of $47 if sold. Demand for Peking Duck can be described by a Poisson distribution with a mean of 4.2 ducks per day. Unsold ducks at the end of each day are converted to duck soup at an additional cost of $5 over and above the resulting value as soup. How many ducks should be prepared each day?

SL = = .5577For a Poisson distributed variable with a mean of 4.2, this SL falls between the cumulative probabilities associated with levels of 3 and 4 units. Hence, stock four ducks.

Feedback: Stocking four ducks leads to an (effective) service level of .59.


157. A machine is expected to use approximately three spare parts during its useful life. The spares cost $200 each and have no salvage value or other use. The manager has ordered five spares. Assuming a Poisson usage rate, what range of shortage cost is implied?

Ce = $200Mean = 3 (Poisson)Cs = ?Assuming a Poisson-distributed variable with a mean of 3, if stocking 5 units is optimal, this implies that the optimal service level must be between .815 and .916

Thus, Solving for Cs yields a range of Cs from $881.08 to $2,180.95.

Feedback: Solve for shortage cost that leads to a service level falling within the range (inclusive) of 0.815 and 0.916.


158. A manager intends to order a new machine and must now decide on the number of spare parts to order along with the machine. The parts cost $400 each and have no salvage value. The manager has compiled a frequency distribution for the probable usage of spare parts, as shown. For what range of shortage costs would stocking one spare part constitute an optimal decision?Number of

Ce = $400In order for a stocking level of one part to be optimal, the service level must fall in the range .08 to .38 (see frequency distribution). Thus,

Setting the service level ratio equal to .08 yields Cs = $34.78.Setting the service level ratio equal to .38 yields Cs = $245.16.Hence the range of shortage costs for a stocking level of one to be optimal is $34.78 to $245.16.



The Corner Newsstand has demand for a certain weekly magazine that can be approximated by a Poisson distribution with a mean of 9.0. Magazines are purchased for $1.50.


159. If unsold copies can be returned for half credit and the owner stocks ten copies, what is the implied range of shortage cost?

Ce = $.75Given Poisson-distributed demand with a mean of 9.0, the optimum service level must be between .587 and .706.

Service level of .587 implies Cs = $1.07Service level of .706 implies Cs = $1.80Thus the range of shortage costs implied by stocking ten copies is $1.07 to $1.80.



160. If unsold copies must be destroyed and copies sell for $4.00 each, find the optimum stocking level.

Ce = $1.50 Cs = $4.00 - 1.50 = $2.50

Given Poisson-distributed demand with a mean of 9.0, this SL falls between 9 and 10 units. Thus, we would stock 10 copies.

Feedback: Compare the service level ratio to the cumulative distribution of demand with Poisson-distributed demand with a mean of 9.0.


161. If unsold copies can be returned for half credit and copies sell for $4.25 each, find the optimal stocking level.

Ce = $1.50/2 = $.75 Cs = $4.25 - 1.50 = $2.75

Given Poisson-distributed demand with a mean of 9.0, this SL falls between 10 and 11 units. Stock 11 copies of each issue.

Feedback: Compare the service level ratio to the cumulative distribution of demand with Poisson-distributed demand with a mean of 9.0.


162. Demand for a component averages 80 units per week, with a weekly standard deviation of demand of 14 units. The current supplier of this component offers a four-week lead time. Stockout risk is to be kept at 8%. Assume that it costs $50 to hold one unit in inventory for a year. Suppose the annual cost for the items would be $500 higher if they were purchased from another vendor, but that vendor would offer a two-week lead time. Would it be better to go with the more-expensive but more-responsive vendor?

Yes, using the second vendor would be cheaper overall.

Feedback: Required safety stock for the cheaper-but-slower vendor would be approximately 39 units. Required safety stock for the more-expensive-but-faster vendor would be approximately 28 units. The $550 reduction in annual holding costs would more than offset the greater expense in purchase costs.


ch13 Summary

Category # of Questi ons

AACSB: Analytic 65

AACSB: Reflective Thinking 97

Blooms: Apply 65

Blooms: Remember 76

Blooms: Understand 21

Difficulty: Easy 24

Difficulty: Hard 41

Difficulty: Medium 97

Learning Objective: 13-01 Define the term inventory; list the major reasons for holding inventories; and list the main requirements for effective inventory management.

12

Learning Objective: 13-02 Discuss the nature and importance of service inventories. 1

Learning Objective: 13-03 Explain periodic and perpetual review systems. 7

Learning Objective: 13-04 Explain the objectives of inventory management. 10

Learning Objective: 13-05 Describe the A-B-C approach and explain how it is useful. 7

Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. 51

Learning Objective: 13-07 Describe the economic production quantity model and solve typical problems. 6

Learning Objective: 13-08 Describe the quantity discount model and solve typical problems. 12

Learning Objective: 13-09 Describe reorder point models and solve typical problems. 37

Learning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems. 19

Learning Objective: 13-10 Describe situations in which the singleperiod model would be appropriate; and solve typical problems. 1

Stevenson - Chapter 13 169

Topic Area: How Much to Order: Economic Order Quantity Models 68

Topic Area: How Much to Order: Fixed-Order-Interval Model 8

Topic Area: Introduction 1

Topic Area: Inventory Ordering Policies 1

Topic Area: Operations Strategy 7

Topic Area: Reorder Point Ordering 36

Topic Area: Requirements for Effective Inventory Management 12

Topic Area: The Nature and Importance of Inventories 11

Topic Area: The Single-Period Model 19

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