# Chapter 12 Inventory Management

6) Which of the following statements regarding Amazon.com is FALSE?

A) The company was opened by Jeff Bezos in 1995.

B) The company was founded as, and still is, a “virtual” retailer with no inventory.

C) The company is now a world-class leader in warehouse automation and management.

D) The company uses both United Parcel Service and the U.S. Postal Service as shippers.

E) Amazon obtains its competitive advantage through inventory management.

7) Which of the following is a function of inventory?

A) to decouple various parts of the production process

B) to provide a selection of goods for anticipated customer demand and to separate the firm from fluctuations in that demand

C) to take advantage of quantity discounts

D) to hedge against inflation

E) All of the above are functions of inventory.

8) Which of the following would NOT generally be a motive for a firm to hold inventories?

A) to decouple various parts of the production process

B) to provide a selection of goods for anticipated customer demand and to separate the firm from fluctuations in that demand

C) to take advantage of quantity discounts

D) to minimize holding costs

E) to hedge against inflation

9) Which of the following is NOT one of the four main types of inventory?

A) raw material inventory

B) work-in-process inventory

C) maintenance/repair/operating supply inventory

D) safety stock inventory

E) finished-goods inventory

8) Which of the following statements about ABC analysis is FALSE?

A) ABC analysis is based on the presumption that controlling the few most important items produces the vast majority of inventory savings.

B) In ABC analysis, “A” items should have tighter physical inventory control than “B” or “C” items have.

C) In ABC analysis, forecasting methods for “C” items may be less sophisticated than for “A” items.

D) ABC analysis is based on the presumption that all items must be tightly controlled to produce important cost savings.

E) Criteria other than annual dollar volume, such as high holding cost or delivery problems, can determine item classification in ABC analysis.

9) All EXCEPT which of the following statements about ABC analysis are true?

A) In ABC analysis, inventory may be categorized by measures other than dollar volume.

B) ABC analysis categorizes on-hand inventory into three groups based on annual dollar volume.

C) ABC analysis is an application of the Pareto principle.

D) ABC analysis suggests that all items require the same high degree of control.

E) ABC analysis suggests that there are the critical few and the trivial many inventory items.

10) ABC analysis is based upon the principle that:

A) all items in inventory must be monitored very closely.

B) there are usually a few critical items, and many items that are less critical.

C) an item is critical if its usage is high.

D) more time should be spent on class “C” items because there are many more of them.

E) as with grade distributions in many MBA courses, there should be more medium-level “B” items than either “A” or “C” items.

11) ABC analysis divides on-hand inventory into three classes, generally based upon which of the following?

A) item quality

B) unit price

C) the number of units on hand

D) annual demand

E) annual dollar volume

12) Cycle counting:

A) is a process by which inventory records are verified once a year.

B) eliminates annual inventory adjustments.

C) provides a measure of inventory turnover.

D) assumes that all inventory records must be verified with the same frequency.

E) assumes that the most frequently used items must be counted more frequently.

13) Which of the following statements regarding control of service inventories is TRUE?

A) Service inventory is a fictional concept, because services are intangible.

B) Service inventory needs no safety stock, because there’s no such thing as a service stockout.

C) Effective control of all goods leaving the facility is one applicable technique.

D) Service inventory has carrying costs but no setup costs.

E) Good personnel selection, training, and discipline are easy.

14) Among the advantages of cycle counting is that it:

A) makes the annual physical inventory more acceptable to management.

B) does not require the detailed records necessary when annual physical inventory is used.

C) does not require highly trained people.

D) allows more rapid identification of errors and consequent remedial action than is possible with annual physical inventory.

E) does not need to be performed for less expensive items.

3) Which of the following is an element of inventory holding costs?

A) housing costs

B) material handling costs

C) investment costs

D) pilferage, scrap, and obsolescence

E) All of the above are elements of inventory holding costs.

4) Which category of inventory holding costs has a much higher percentage than average for rapid-change industries such as PCs and cell phones?

A) housing costs

B) material handling costs

C) labor cost

D) investment costs

E) pilferage, scrap, and obsolescence

10) The two most basic inventory questions answered by the typical inventory model are:

A) timing of orders and cost of orders.

B) order quantity and cost of orders.

C) timing of orders and order quantity.

D) order quantity and service level.

E) ordering cost and carrying cost.

11) Which of the following is NOT an assumption of the economic order quantity model shown below?

Q* =√2DS/H

A) Demand is known, constant, and independent.

B) Lead time is known and constant.

C) Quantity discounts are not possible.

D) Production and use can occur simultaneously.

E) The only variable costs are setup cost and holding (or carrying) cost.

12) What is the primary purpose of the basic economic order quantity model shown below?

Q* =√2DS/H

A) to calculate the reorder point, so that replenishments take place at the proper time

B) to minimize the sum of carrying cost and holding cost

C) to maximize the customer service level

D) to minimize the sum of setup cost and holding cost

E) to calculate the optimum safety stock

13) If the actual order quantity is the economic order quantity in a problem that meets the assumptions of the economic order quantity model shown below, the average amount of inventory on hand:

Q* = √2DS/H

A) is smaller than the holding cost per unit.

B) is zero.

C) is one-half of the economic order quantity.

D) is affected by the amount of product cost.

E) goes down if the holding cost per unit goes down.

14) A certain type of computer costs $1,000, and the annual holding cost is 25% of the value of the item. Annual demand is 10,000 units, and the order cost is $150 per order. What is the approximate economic order quantity?

A) 16

B) 70

C) 110

D) 183

E) 600

15) Most inventory models attempt to minimize:

A) the likelihood of a stockout.

B) the number of items ordered.

C) total inventory-based costs.

D) the number of orders placed.

E) the safety stock.

16) In the basic EOQ model, if the cost of placing an order doubles, and all other values remain constant, the EOQ will:

A) increase by about 41%.

B) increase by 100%.

C) increase by 200%.

D) increase, but more data is needed to say by how much.

E) either increase or decrease.

17) In the basic EOQ model, if D = 6000 per year, S = $100, and holding cost = $5 per unit per month, what is the economic order quantity?

A) 24

B) 100

C) 141

D) 490

E) 600

18) Which of the following statements about the basic EOQ model is TRUE?

A) If the ordering cost were to double, the EOQ would rise.

B) If annual demand were to double, the EOQ would increase.

C) If the carrying cost were to increase, the EOQ would fall.

D) If annual demand were to double, the number of orders per year would increase.

E) All of the above statements are true.

19) Which of the following statements about the basic EOQ model is FALSE?

A) If the setup cost were to decrease, the EOQ would fall.

B) If annual demand were to double, the number of orders per year would increase.

C) If the ordering cost were to increase, the EOQ would rise.

D) If annual demand were to double, the EOQ would also double.

E) All of the above statements are true.

20) A product whose EOQ is 40 units experiences a decrease in ordering cost from $90 per order to $10 per order. The revised EOQ is:

A) three times as large.

B) one-third as large.

C) nine times as large.

D) one-ninth as large.

E) cannot be determined

21) A product whose EOQ is 400 units experiences a 50% increase in demand. The new EOQ is:

A) unchanged.

B) increased by less than 50%.

C) increased by 50%.

D) increased by more than 50%.

E) cannot be determined

22) For a certain item, the cost-minimizing order quantity obtained with the basic EOQ model is 200 units, and the total annual inventory (carrying and setup) cost is $600. What is the inventory carrying cost per unit per year for this item?

A) $1.50

B) $2.00

C) $3.00

D) $150.00

E) not enough data to determine

23) A product has a demand of 4000 units per year. Ordering cost is $20, and holding cost is $4 per unit per year. The EOQ model is appropriate. The cost-minimizing solution for this product will cost ________ per year in total annual inventory (holding and setup) costs.

A) $400

B) $800

C) $1200

D) Zero; this is a class C item.

E) Cannot be determined because the unit price is not known.

24) A product has a demand of 4000 units per year. Ordering cost is $20, and holding cost is $4 per unit per year. The cost-minimizing solution for this product is to order:

A) all 4000 units at one time.

B) 200 units per order.

C) every 20 days.

D) 10 times per year.

E) none of the above

25) Which of the following statements regarding the reorder point is TRUE?

A) The reorder point is that quantity that triggers an action to restock an item.

B) There is a reorder point even if lead time and demand during lead time are constant.

C) The reorder point is larger than d × L if safety stock is present.

D) A shorter lead time implies a smaller reorder point.

E) All of the above are true.

26) An inventory decision rule states, “When the inventory level goes down to 14 gearboxes, 100 gearboxes will be ordered.” Which of the following statements is TRUE?

A) One hundred is the reorder point, and 14 is the order quantity.

B) Fourteen is the reorder point, and 100 is the order quantity.

C) The number 100 is a function of demand during lead time.

D) Fourteen is the safety stock, and 100 is the reorder point.

E) None of the above is true.

27) Which of the following statements regarding the production order quantity model is TRUE?

A) It applies only to items produced in the firm’s own production departments.

B) It relaxes the assumption that all the order quantity is received at one time.

C) It relaxes the assumption that the demand rate is constant.

D) It minimizes the total production costs.

E) It minimizes inventory.

28) Which of these statements about the production order quantity model is FALSE?

A) The production order quantity model is appropriate when the assumptions of the basic EOQ model are met, except that receipt is noninstantaneous.

B) Because receipt is noninstantaneous, some units are used immediately and not stored in inventory.

C) Average inventory is less than one-half of the production order quantity.

D) All else equal, the smaller the ratio of demand rate to production rate, the larger is the production order quantity.

E) None of the above is false.

29) The assumptions of the production order quantity model are met in a situation where annual demand is 3650 units, setup cost is $50, holding cost is $12 per unit per year, the daily demand rate is 10 and the daily production rate is 100. What is the production order quantity for this problem?

A) 139

B) 174

C) 184

D) 365

E) 548

30) A production order quantity problem has a daily demand rate = 10 and a daily production rate = 50. The production order quantity for this problem is approximately 612 units. What is the average inventory for this problem?

A) 61

B) 245

C) 300

D) 306

E) 490

31) When quantity discounts are allowed, the cost-minimizing order quantity:

A) is always an EOQ quantity.

B) minimizes the sum of holding and ordering costs.

C) minimizes the unit purchase price.

D) may be a quantity below that at which one qualifies for that price.

E) minimizes the sum of holding, ordering, and product costs.

32) Which of the following statements about quantity discounts is FALSE?

A) The cost-minimizing solution may or may not be where annual holding costs equal annual ordering costs.

B) In inventory management, item cost becomes relevant to order quantity decisions when a quantity discount is available.

C) If carrying costs are expressed as a percentage of value, EOQ is larger at each lower price in the discount schedule.

D) The larger the annual demand, the less attractive a discount schedule will be.

E) The smaller the ordering cost, the less attractive a discount schedule will be.

3) If the standard deviation of demand is six per week, demand is 50 per week, and the desired service level is 95%, approximately what is the statistical safety stock?

A) 8 units

B) 10 units

C) 16 units

D) 64 units

E) Cannot be determined without lead time data.

4) A specific product has demand during lead time of 100 units, with a standard deviation during lead time of 25 units. What safety stock (approximately) provides a 95% service level?

A) 41

B) 55

C) 133

D) 140

E) 165

5) Demand for dishwasher water pumps is 8 per day. The standard deviation of demand is 3 per day, and the order lead time is four days. The service level is 95%. What should the reorder point be?

A) about 18

B) about 24

C) about 32

D) about 38

E) more than 40

6) The purpose of safety stock is to:

A) replace failed units with good ones.

B) eliminate the possibility of a stockout.

C) eliminate the likelihood of a stockout due to erroneous inventory tally.

D) control the likelihood of a stockout due to variable demand and/or lead time.

E) protect the firm from a sudden decrease in demand.

7) The proper quantity of safety stock is typically determined by:

A) using a single-period model.

B) carrying sufficient safety stock so as to eliminate all stockouts.

C) multiplying the EOQ by the desired service level.

D) setting the level of safety stock so that a given stockout risk is not exceeded.

E) minimizing total costs.

8) If demand is not uniform and constant, then stockout risks can be controlled by:

A) increasing the EOQ.

B) spreading annual demand over more frequent, but smaller, orders.

C) raising the selling price to reduce demand.

D) adding safety stock.

E) reducing the reorder point.

9) If daily demand is normally distributed with a mean of 15 and standard deviation of 5, and lead time is constant at 4 days, a 90 percent service level will require how much safety stock?

A) 7 units

B) 10 units

C) 13 units

D) 16 units

E) 26 units

10) If daily demand is constant at 10 units per day, and lead time averages 12 days with a standard deviation of 3 days, 95 percent service requires how much safety stock?

A) 28 units

B) 30 units

C) 49 units

D) 59 units

E) 114 units

11) In a safety stock problem where both demand and lead time are variable, demand averages 150 units per day with a daily standard deviation of 16, and lead time averages 5 days with a standard deviation of 1 day. What is the standard deviation of demand during lead time?

A) 15 units

B) 100 units

C) 154 units

D) 500 units

E) 13,125 units

1) Which of the following items is mostly likely managed using a single-period order model?

A) Christmas trees

B) canned food at the grocery store

C) automobiles at a dealership

D) metal for a manufacturing process

E) gas sold to a gas station

2) The main trait of a single-period model is that:

A) inventory has limited value after a certain period of time.

B) it has the largest EOQ sizes.

C) the order quantity should usually equal the expected value of demand.

D) supply is limited.

E) the cost of a shortage cannot be determined accurately.

3) A local club is selling Christmas trees and deciding how many to stock for the month of December. If demand is normally distributed with a mean of 100 and standard deviation of 20, trees have no salvage value at the end of the month, trees cost $20, and trees sell for $50 what is the service level?

A) .60

B) .20

C) .84

D) .40

E) unable to determine given the above information

4) Suppose that papers for a newspaper stand cost $0.40 and sell for $0.80. They currently have no salvage value. If the stand owner is able to find an outlet that would provide a salvage value of $0.10, what would be the increase in service level?

A) .5

B) 0

C) .07

D) 1

E) unable to determine given only the above information

5) Service level is:

A) the probability of stocking out.

B) the probability of not stocking out.

C) something that should be minimized in retail.

D) calculated as the cost of a shortage divided by (the cost of shortage + the cost of overage) for single-period models.

E) B and D

6) A bakery wants to determine how many trays of doughnuts it should prepare each day. Demand is normal with a mean of 5 trays and standard deviation of 1 tray. If the owner wants a service level of at least 95%, how many trays should he prepare (rounded to the nearest whole tray)? Assume doughnuts have no salvage value after the day is complete.

A) 5

B) 4

C) 6

D) 7

E) unable to determine with the above information

2) The fixed-period inventory system requires more safety stock than a fixed-quantity system because:

A) a stockout can occur during the review period as well as during the lead time.

B) this model is used for products that have large standard deviations of demand.

C) this model is used for products that require very high service levels.

D) replenishment is not instantaneous.

E) setup costs and holding costs are large.

3) A disadvantage of the fixed-period inventory system is that:

A) it involves higher ordering costs than the fixed quantity inventory system.

B) additional inventory records are required.

C) the average inventory level is decreased.

D) since there is no count of inventory during the review period, a stockout is possible.

E) orders usually are for larger quantities.

4) What is the difference between P and Q inventory systems?

A) order size

B) order spacing

C) maximum service level

D) lead time length

E) A and B

5) Which of the following is a requirement of Q systems?

A) perpetual inventory system

B) constant order spacing

C) variable lead time

D) constant demand

E) all of the above

6) Q is to ________ systems as P is to ________ systems.

A) fixed quantity, fixed period

B) variable demand, constant demand

C) variable lead time, variable demand

D) variable quantity, variable period

E) quality, price

7) Which of the following should be higher in P systems than Q systems?

A) lead time

B) demand

C) order size

D) order spacing

E) safety stock

8) An advantage of the fixed-period inventory system is that:

A) safety stock will be lower than it would be under a fixed-quantity inventory system.

B) there is no physical count of inventory items when an item is withdrawn.

C) no inventory records are required.

D) orders usually are for smaller order quantities.

E) the average inventory level is reduced.