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12 Chapter Inventory Management
Chapter
12
TRUE/FALSE
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Inventory Management
Inventory management is the planning and controlling of inventories in order to meet the competitive priorities of the organization.
Reference: Introduction Difficulty: Easy Keywords: inventory management, planning, controlling When looking at inventory management, the term lot size refers to the physical dimensions of the area where the inventory is stored. Reference: Introduction Difficulty: Easy Keywords: inventory management, lot size When looking at inventory management, the term lot size refers to the quantity of an inventory item management either buys from a supplier or manufactures using internal processes. Reference: Introduction Difficulty: Easy Keywords: inventory management, lot size, buys, manufactures A stock-keeping unit (SKU) is an individual item or product that has an identifying code and is held in inventory somewhere along the supply chain. Reference: Inventory Management Across The Organization Difficulty: Easy Keywords: SKU, individual item, inventory, identifying code A stock-keeping unit (SKU) is a specially designed container for holding a specific amount of an inventory item somewhere along the supply chain. Reference: Inventory Management Across The Organization Difficulty: Easy Keywords: SKU, inventory item, inventory, supply chain ABC analysis is a process for categorizing SKUs according to dollar usage so that managers can focus on items with the highest dollar value. Reference: Inventory Management Across The Organization Difficulty: Moderate Keywords: ABC analysis, dollar value
252 Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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When using ABC analysis, class C SKUs should be reviewed frequently. Reference: Inventory Management Across The Organization Difficulty: Moderate Keywords: ABC analysis, class
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Cycle counting is an inventory-control method whereby storeroom personnel physically count a small percent of the total number of items each day.
Reference: Inventory Management Across The Organization Difficulty: Moderate Keywords: cycle counting, physical count
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EOQ should be used if you use a make-to-order strategy and the customer specifies the entire order be delivered in one shipment. Reference: Economic Order Quantity Difficulty: Easy Keywords: EOQ, economic order quantity EOQ should be used if you follow a make-to-stock strategy and the item has relatively stable demand. Reference: Economic Order Quantity Difficulty: Easy Keywords: EOQ, economic order quantity The EOQ is the smallest lot size that a supplier will allow a customer to order. Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity As the annual demand increases, the EOQ also increases. Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity Considering the EOQ model, smaller lots are justified when holding costs are decreased. Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, holding cost, lot size Considering the EOQ model, a reduction in ordering costs justifies reducing the lot sizes ordered. Reference: Economic Order Quantity Difficulty: Easy Keywords: EOQ, economic order quantity, ordering cost, lot size
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Dependent demand items are those items for which demand is influenced by market conditions and is not related to inventory decisions for any other item held in stock. Reference: Inventory Control Systems Difficulty: Moderate Keywords: dependent demand, inventory Independent-demand items are those items for which demand is influenced by market conditions and is not related to inventory decisions for any other items held in stock. Reference: Inventory Control Systems Difficulty: Moderate Keywords: independent demand, inventory If on-hand inventory = 100 units, scheduled receipts = 100 units and backorders = 100 units, the Inventory Position (IP) is the sum of the three, or 300 units. Reference: Inventory Control Systems Difficulty: Moderate Keywords: continuous review, periodic review, inventory position If on-hand inventory = 100 units, scheduled receipts = 100 units and backorders = 100 units, the Inventory Position (IP) is 100 units. Reference: Inventory Control Systems Difficulty: Moderate Keywords: continuous review, periodic review, inventory position A continuous review system is sometimes called a reorder point system. Reference: Inventory Control Systems Difficulty: Moderate Keywords: continuous review, reorder point A continuous review system is sometimes called a fixed interval reorder system. Reference: Inventory Control Systems Difficulty: Moderate Keywords: continuous review, reorder point The scheduled receipts are orders that have been placed but not yet received. Reference: Inventory Control Systems Difficulty: Moderate Keywords: scheduled receipt As the service level increases, the probability of not running out of stock during a cycle decreases. Reference: Inventory Control Systems Difficulty: Moderate Keywords: service level, stockout
254 Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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The two-bin inventory system is a type of visual system. Reference: Inventory Control Systems Difficulty: Moderate Keywords: two-bin, visual system A periodic review system is a system in which an items inventory position is reviewed periodically rather than continuously. Reference: Inventory Control Systems Difficulty: Moderate Keywords: periodic review, continuous
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MULTIPLE CHOICE 25.
What is generally true about the class A SKUs in ABC analysis? They represent: a. about 20 percent of all SKUs. b. about 30 percent of all SKUs. c. about 20 percent of the dollar usage. d. about 50 percent of the dollar usage. Reference: Inventory Management Across The Organization Difficulty: Moderate Keywords: ABC analysis, class A What is generally true about the class A SKUs in ABC analysis? They represent: a. about 50 percent of all SKUs. b. about 80 percent of all SKUs. c. about 20 percent of the dollar usage. d. about 80 percent of the dollar usage. Reference: Inventory Management Across The Organization Difficulty: Moderate Keywords: ABC analysis, class A What is generally true about the class B SKUs in ABC analysis? They represent: a. about 20 percent of all SKUs and about 80 percent of the dollar usage. b. about 80 percent of all SKUs and about 20 percent of the dollar usage. c. about 30 percent of all SKUs and about 15 percent of the dollar usage. d. about 50 percent of all SKUs and about 95 percent of the dollar usage. Reference: Inventory Management Across The Organization Difficulty: Moderate Keywords: ABC analysis, class B
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Chapter 12 Inventory Management
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What is generally true about the class C SKUs in ABC analysis? They represent: a. about 20 percent of all SKUs. b. about 50 percent of all SKUs. c. about 15 percent of the dollar usage. d. about 50 percent of the dollar usage. Reference: Inventory Management Across The Organization Difficulty: Moderate Keywords: ABC, analysis, Pareto, class C What is generally true about the class C SKUs in ABC analysis? They represent: a. about 20 percent of all SKUs. b. about 30 percent of all SKUs. c. about 5 percent of the dollar usage. d. about 50 percent of the dollar usage. Reference: Inventory Management Across The Organization Difficulty: Moderate Keywords: ABC analysis, Pareto, class C ABC analysis is closely related to: a. three-bin analysis. b. EOQ analysis. c. repeatability analysis. d. Pareto analysis. Reference: Inventory Management Across The Organization Difficulty: Moderate Keywords: ABC analysis, Pareto analysis Which one of the following is NOT a method for tracking inventory and ensuring accurate records? a. Assigning responsibility to specific employees for issuing and receiving materials b. Updating the reorder points to minimize safety stock c. Cycle counting d. Logic error checks Reference: Inventory Management Across The Organization Difficulty: Moderate Keywords: ABC analysis, cycle counting Which one of the following is not an assumption of the EOQ model? a. Decisions for one item can be made independently of decisions made for other items. b. There is no uncertainty in lead-time. c. The amount of an order received is exactly equal to what was ordered, without any short shipments from a supplier or scrap losses in the shop. d. Quantity discounts can be taken advantage of for large lot sizes. Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, assumptions
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Chapter 12 Inventory Management
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Which one of the following statements regarding the economic order quantity (EOQ) is TRUE? a. The EOQ model combines several different item orders to the same supplier. b. If an order quantity is larger than the EOQ, the annual holding cost for cycle inventory exceeds the annual ordering cost. c. The EOQ model assumes a variable demand pattern. d. When the interest rate drops, the inventory holding cost decreases and the EOQ decreases. Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, cycle inventory Which one of the following statements concerning the economic order quantity (EOQ) model is TRUE? a. An increase in holding cost will increase the EOQ. b. A decrease in demand will increase the EOQ. c. A decrease in holding cost will increase the EOQ. d. None of the above is true. Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, holding cost Which one of the following statements concerning the economic order quantity (EOQ) is TRUE? a. The EOQ is the order quantity that minimizes annual inventory holding costs. b. An increase in demand will increase the EOQ. c. The time between orders (TBO) will increase with an increase in holding costs. d. The EOQ formula assumes that there are only three relevant costs: holding, transportation, and setup. Reference: Economic Order Quantity Difficulty: Hard Keywords: EOQ, economic order quantity You have taken a job in industry and are facing your first ordering decision. As you prepare to place the order, you remember your instructor teaching you that you wouldnt use the EOQ formula if: a. you followed a make-to-stock strategy for an item with stable demand. b. your carrying costs and ordering costs are known and relatively stable. c. the order size is constrained by capacity limitations such as the number or size of the delivery trucks. d. your setup costs and holding costs remain constant and can be determined. Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity
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Chapter 12 Inventory Management
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A company operating under an EOQ policy enjoys rising annual demand for their products for three consecutive years. During this time their holding cost and ordering cost remain constant. Which statement is best? a. Their order quantity will fall and so will the time between orders. b. Their order quantity will fall but the time between orders will rise c. Their order quantity will rise but the time between orders will fall. d. Their order quantity will rise and so will the time between orders. Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, time between orders The Lemma Company manufactures and sells 10 products. Ways have been found to cut both the setup and inventory holding costs in half. What effect will this have on the economic order quantities of the 10 products? a. They will be reduced by a factor of 1.41. b. They will not change. c. They will be reduced by a factor of 2.00. d. They will be increased by a factor of 1.41. Reference: Economic Order Quantity Difficulty: Hard Keywords: EOQ, economic order quantity, setup cost, holding cost The Lemming Company implements an aggressive marketing campaign and effectively doubles the annual demand for Model 13s. Their total annual holding cost should: a. decrease by 50%. b. increase by 100%. c. stay the same. d. increase by 40%. Reference: Economic Order Quantity Difficulty: Hard Keywords: EOQ, economic order quantity, holding cost Sensitivity analysis on the economic order quantity (EOQ) formula can help the operations manager answer several questions on how to manage inventories. Which one of the following questions is NOT answered by EOQ sensitivity analysis? a. How critical are errors in estimating demand (D), inventory holding cost (H), and setup cost (S)? b. What should happen to lot sizes if interest rates drop? c. What should happen to cycle inventory if the demand rate increases? d. What should happen to lot sizes if supply and lead-time uncertainty increase? Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, lead time, sensitivity analysis
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Chapter 12 Inventory Management
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Vilas County Hospital consumed 400 boxes of bandages per week last year. The price of bandages was $80 per box, and the hospital operates 52 weeks per year. The cost of processing an order was $64, and the cost of holding one box throughout a full year was 20% of the value of the material. Last year the hospital ordered bandages, on average, once every two weeks, each time ordering 800 boxes. What extra cost did the hospital incur that could have been avoided if the EOQ concept had been applied?
a. Less than or equal to $650
b. More than $650 and less than $1,050 c. More than $1,050 and less than $1,450 d. More than $1,450 Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, total cost Scenario 12.1 The Talbot Company uses electrical assemblies to produce an array of small appliances. One of its high cost / high volume assemblies, the XO-01, has an estimated annual demand of 8,000 units. Talbot estimates the cost to place an order is $50, and the holding cost for each assembly is $20 per year. The company operates 250 days per year.
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Use the information in Scenario 12.1. What is the economic order quantity for the XO01? a. Less than or equal to 100 units b. Greater than 100 units but less than or equal to 180 units c. Greater than 180 units but less than or equal to 250 units d. Greater than 250 units Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity Use the information in Scenario 12.1. What are the annual inventory holding costs if Talbot orders using the EOQ quantity? a. Less than or equal to $1,500 b. Greater than $1,500 but less than or equal to $4,000 c. Greater than $4,000 but less than or equal to $6,500 d. Greater than $6,500 Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, inventory holding cost
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Use the information in Scenario 12.1. What are the annual ordering costs if Talbot orders using the EOQ quantity? a. Less than or equal to $1,000 b. Greater than $1,000 but less than or equal to $2,500 c. Greater than $2,500 but less than or equal to $4,000 d. Greater than $4,000 Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, ordering cost Use the information in Scenario 12.1. What are the total annual holding and ordering
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costs if Talbot orders using the EOQ quantity? a. Greater than $7,000 b. Greater than $5,000 but less than or equal to $7,000 c. Greater than $2,500 but less than or equal to $5,000 d. Less than or equal to $2,500
Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, total inventory holding and ordering costs 46. Use the information in Scenario 12.1. What is the cycle length (time between orders) when orders are placed using the EOQ quantity? a. Less than 5 days b. Greater than 5 days but less than or equal to 10 days c. Greater than 10 days but less than or equal to 15 days d. Greater than 15 days Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, cycle length, time between orders Use the information in Scenario 12.1. How many times per year must Talbot order the XO-01 when orders are placed using the EOQ quantity? a. Less than 10 times per year b. Greater than 10 times but less than or equal to 20 times per year c. Greater than 20 times but less than or equal to 30 times per year d. Greater than 30 times per year Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, orders per year
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Chapter 12 Inventory Management
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Use the information in Scenario 12.1. The purchasing manager decides that, in order to save purchasing time, orders for the XO-01 will be placed every three months, or four times per year. How much does this approach cost Talbot in total annual holding and ordering costs (instead of Talbot ordering using the EOQ quantity)? a. Greater than $18,000 b. Greater than $14,000 but less than or equal to $18,000 c. Greater than $10,000 but less than or equal to $14,000 d. Less than or equal to $10,000 Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, total inventory holding and ordering costs
Scenario 12.2 The Burdell Company is a small manufacturing company that uses gear assemblies to produce four different models of mountain bikes. One of these gear assemblies, the Smooth Shifter, is used for the two most expensive of Burdells four models, and has an estimated annual demand of 300 units. Burdell estimates the cost to place an order is $40, and the holding cost for each assembly is $60 per year. The company operates 250 days per year. 49. Use the information in Scenario 12.2. What is the economic order quantity for the Smooth Shifter? a. Less than or equal to 40 units b. Greater than 40 units but less than or equal to 80 units c. Greater than 80 units but less than or equal to 120 units d. Greater than 120 units Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity Use the information in Scenario 12.2. What are the annual inventory holding costs if Burdell orders using the EOQ quantity? a. Less than or equal to $300 b. Greater than $300 but less than or equal to $500 c. Greater than $500 but less than or equal to $700 d. Greater than $700 Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, inventory holding cost
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Chapter 12 Inventory Management
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Use the information in Scenario 12.2. What are the annual ordering costs if Burdell orders using the EOQ quantity? a. Less than or equal to $200 b. Greater than $200 but less than or equal to $350 c. Greater than $350 but less than or equal to $500 d. Greater than $500 Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, ordering cost Use the information in Scenario 12.2. What are the total annual holding and ordering costs if Burdell orders using the EOQ quantity? a. Greater than $1,500 b. Greater than $1,000 but less than or equal to $1,500 c. Greater than $750 but less than or equal to $1,000 d. Less than or equal to $750 Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, total inventory holding and ordering costs Use the information in Scenario 12.2. What is the cycle length (time between orders) when orders are placed using the EOQ quantity? a. Less than or equal to 5 days b. Greater than 5 days but less than or equal to 10 days c. Greater than 10 days but less than or equal to 15 days d. Greater than 15 days Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, cycle length, TBO Use the information in Scenario 12.2. How many times per year must Burdell order the Smooth Shifter when orders are placed using the EOQ quantity? a. Less than or equal to 10 times per year b. More than 10 times but fewer than or equal to 20 times per year c. More than 20 times but fewer than or equal to 30 times per year d. More than 30 times per year Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, orders per year
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Chapter 12 Inventory Management
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Use the information in Scenario 12.2. The purchasing manager decides that, in order to save purchasing time, orders for the Smooth Shifter will be placed once a month, or twelve times per year. How much does this approach cost Burdell in total annual holding and ordering costs (instead of Burdell ordering using the EOQ quantity)? a. More than $500 b. More than $200 but less than or equal to $500 c. More than $50 but less than or equal to $200 d. Less than or equal to $50 Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, total inventory holding and ordering costs
Scenario 12.3 Tom Bergman, owner and operator of the Earplug Superstore, is reviewing the costs associated with the stores best-selling hearing aid, the BZ15. The data available to Mr. Bergman concerning this device follow. Demand = 25 units/week Order cost = $3/order Holding cost = $1.50/unit/year The Earplug Superstore operates 52 weeks a year.
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Use the information in Scenario 12.3. If Tom decides to order at the economic order quantity, what is the sum of the annual ordering cost and holding cost? a. Less than or equal to $90 b. Greater than $90 but less than or equal to $100 c. Greater than $100 but less than or equal to $115 d. Greater than $115 Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, total cost Use the information in Scenario 12.3. Tom cuts the ordering cost in half by implementing a streamlined processing system. How many fewer units should he now order each time he places an order? e. Less than or equal to 10 units f. Greater than 10 but less than or equal to 15 units g. Greater than 15 but less than or equal to 20 units h. Greater than 20 units Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, ordering cost Use the information in Scenario 12.3. If Tom orders a one-year supply at a time, how much higher are his total (ordering and holding) costs compared to total costs incurred if he ordered at his EOQ?
263 Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Chapter 12 Inventory Management
a. Less than or equal to $600
b. Greater than $600 but less than or equal to $700 c. Greater than $700 but less than or equal to $800 d. Greater than $800 Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, total cost
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Use the information in Scenario 12.3. If Tom orders at the economic order quantity, how many units does he order at a time? a. Less than or equal to 75 units b. Greater than 75 but less than or equal to 150 units c. Greater than 150 but less than or equal to 250 units d. Greater than 250 units Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity Use the information in Scenario 12.3. If Tom orders such that his annual holding cost is twice what his annual ordering cost is, how many units at a time is he ordering? a. Less than or equal to 100 units b. Greater than 100 but less than or equal to 105 units c. Greater than 105 but less than or equal to 110 units d. Greater than 110 units Reference: Economic Order Quantity Difficulty: Hard Keywords: EOQ, economic order quantity A neighborhood sportswear store sells a pair of Victoria sneakers for $40. Due to the recent fitness craze, these shoes are in high demand: 50 pairs of shoes are sold per week. The ordering cost is $20 per order, and the annual holding cost is 20% of selling price. If the store operates 52 weeks a year, what can you say about the current lot size of 235? a. Too large b. Too small c. Just right d. Cannot tell from the information given Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity
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Chapter 12 Inventory Management
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An item experiences an annual demand of 7,200 units. It costs $8 to hold an item in inventory for one year and $16 to place an order. If the EOQ model is used, what is the time between orders? Assume that there are 52 business weeks in a year. a. Less than 1 week b. Greater than 1 week but less than or equal to 2 weeks c. Greater than 2 weeks but less than or equal to 3 weeks d. Greater than 3 weeks Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, time between orders
Scenario 12.4 Consider the following data for an independent-demand item maintained by Vicki Crittenden, the proprietor of a local auto repair shop: Weekly demand = 50 units Ordering cost = $8/order Holding cost = $4/unit/year Weeks in a year = 50
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Use the information in Scenario 12.4. If Crittenden uses the EOQ model, how frequently must she place orders for this item? a. Every week b. Every 2 weeks c. Every 3 weeks d. Every 4 weeks Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, time between orders Use the information in Scenario 12.4. Due to new ordering procedures initiated by Crittenden, the ordering cost is dropping to $4 per order. At the same time, the weekly demand increases to 64 units per week due to an increase in business. What effect do these changes have on the EOQ quantity for this item? a. The EOQ quantity remains unchanged. b. The EOQ quantity increases by 20%. c. The EOQ quantity decreases by 20%. d. Sufficient information is not available for answering this question. Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity
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Which one of the following statements concerning a continuous review system is best? a. The inventory position (IP) of an item measures the items ability to satisfy future demand, relying only on the on-hand inventory. b. An items inventory position under a continuous review system increases by Q units as soon as an order is received. c. An items on-hand inventory increases by Q units as soon as an order is placed. d. Under a continuous review system, an items inventory position corresponds to the on-hand inventory unless there are backorders or one or more scheduled receipts. Reference: Inventory Control Systems Difficulty: Hard Keywords: continuous review system, inventory position Which one of the following descriptions best defines the cycle-service level as a measure of customer service? a. The preferred proportion of annual demand instantaneously filled from stock b. The number of stockouts tolerated per year c. The preferred proportion of days in the year when an item is in stock d. The desired probability of not running out of stock in any one inventory cycle Reference: Inventory Control Systems Difficulty: Moderate Keywords: cycle-service level, customer service Which one of the following statements is best? a. The level of safety stock maintained decreases when the desired cycle-service level increases. b. The level of safety stock maintained decreases when the standard deviation of demand during lead-time increases. c. When no safety stock is maintained, stockouts will occur during approximately 50% of the cycles. d. The level of safety stock maintained is greater if mean absolute deviation (MAD) is used rather than standard deviation in estimating forecast errors. Reference: Inventory Control Systems Difficulty: Moderate Keywords: safety stock, stockout An inventory system answers two important questions: when to order and how much to order. Which of the following statements correctly explains how a Q system (continuous review system) or a P system (periodic review system) answers these questions? a. Under a Q system, a fixed quantity is ordered every P time period. b. Under a Q system, an order is placed to replenish the inventory position up to the target level T when the inventory position reaches the reorder point R. c. Under a P system, a fixed quantity Q is ordered when the inventory position reaches the reorder point R. d. Under a P system, an order is placed to replenish the inventory position up to the target level T every P time periods. Reference: Inventory Control Systems Difficulty: Moderate Keywords: Q system, P system, inventory target level (T), inventory position
266 Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Which one of the following statements is best? a. A P system requires more safety stock than a Q system. b. A P system lends itself more to quantity discounts than does a Q system. c. A P system requires more administrative control and computer support than does a Q system. d. In a periodic review system, the value of Q is kept the same from one cycle to another. Reference: Inventory Control Systems Difficulty: Moderate Keywords: P system, Q system Which one of the following statements represents an advantage of the P system over the Q system? a. Less safety stock is carried to achieve the same service level. b. The replenishment intervals can be more easily individualized for items. c. Orders can be more easily combined to the same supplier. d. A P system is more suitable for quantity discounts and capacity limitations. Reference: Inventory Control Systems Difficulty: Moderate Keywords: P system, Q system Which one of the following statements represents an advantage of a Q system over the P system? a. A perpetual inventory system is not mandatory. b. Orders for multiple items from the same supplier can be combined more easily. c. Fixed replenishment intervals are possible, which can be, administratively, quite convenient. d. The Q system is more suited for quantity discounts and physical limitations. Reference: Inventory Control Systems Difficulty: Moderate Keywords: Q system, P system Which one of the following statements about inventory control systems is best? a. A single-bin system is essentially a P system, with the target inventory and current inventory position established visually. b. A base-stock system minimizes ordering and setup costs by placing orders more infrequently. c. The base-stock system is mostly used for inexpensive items because it maximizes cycle inventory costs. d. Visual systems are intended for use with high-value items, such as jet engines, that dont experience a steady demand. Reference: Inventory Control Systems Difficulty: Moderate Keywords: inventory control, single-bin system, P system
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Which one of the following descriptions of a base-stock system is best? a. It is particularly attractive when review and ordering costs are both significant. b. It can be seen as a way to minimize cycle inventory. c. Examples include gasoline storage tanks at a service station. d. An items inventory is stored at two different locations or bins. Reference: Inventory Control Systems Difficulty: Moderate Keywords: base-stock system, cycle inventory Which one of the following statements about inventory control systems is true? a. A two-bin inventory system is essentially a P system because the inventory is reviewed only on a periodic basis. b. An optional replenishment system is particularly attractive when both review and ordering costs are significant. c. Visual systems are difficult to administer because records on current inventory position have to be kept for every item. d. Overstocking is quite common for those items that are managed by using the basestock system. Reference: Inventory Control Systems Difficulty: Moderate Keywords: inventory control, optional replenishment system Consider the following conditions for manufacturing process: On-hand inventory: Open orders (scheduled receipts): Backorders: What is Hesss inventory position for this item? a. 200 units b. 140 units c. 80 units d. 40 units Reference: Inventory Control Systems Difficulty: Easy Keywords: inventory position an item used in the Hess Companys 40 units 100 units 60 units
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Consider the following conditions for an item used in the Hess Companys manufacturing process: On-hand inventory: 40 units Open orders (scheduled receipts): 100 units Backorders: 60 units Reorder point: 100 units Quantity per order: 50 units Which of the following statements best describes Hesss situation regarding inventory replenishment? a. No action is required, since a scheduled receipt is due to be delivered to Hess b. To cover its backorders, Hess should order two lots of 50 units c. Because it is incurring backorders, Hess should increase its reorder point d. Hess should place an order for 50 units, since the inventory position is less than the reorder point Reference: Inventory Control Systems Difficulty: Moderate Keywords: inventory position, reorder point Consider the following conditions for an item used in the Hess Companys manufacturing process: On-hand inventory: 80 units Open orders (scheduled receipts): 100 units Backorders: 20 units What is Hesss inventory position for this item? a. 200 units b. 160 units c. 180 units d. 80 units Reference: Inventory Control Systems Difficulty: Easy Keywords: inventory position
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63.
Consider the following conditions for an item used in the Hess Companys manufacturing process: On-hand inventory: 80 units Open orders (scheduled receipts): 100 units Backorders: 20 units Reorder point: 150 units Quantity per order: 50 units Which of the following statements best describes Hesss situation regarding inventory replenishment? a. No action is required, since Hesss inventory position is greater than the reorder point b. Hess should order one lot of 50 units to cover its backorders c. Because it is incurring backorders, Hess should increase its reorder point d. Hess should place an order for 50 units, since their inventory position is less than the reorder point Reference: Inventory Control Systems Difficulty: Moderate Keywords: inventory position, reorder point
Scenario 12.5 Cranium, Inc., purchases term papers from an overseas supplier under a continuous review system. The average demand for a popular mode is 300 units a day with a standard deviation of 30 units a day. It costs $60 to process each order and there is a five-day lead-time. The holding cost for a paper is $0.25 per year and the company policy is to maintain a 98% service level. Cranium operates 200 days per year. A normal distribution table is appended to this exam.
64.
Use the information in Scenario 12.5. What is the EOQ for these papers? a. Less than or equal to 3,000 units b. than Greater 3,000 units but less than or equal to 4,000 units c. Greater than 4,000 units but less than or equal to 5,000 units d. Greater than 5,000 units Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity Use the information in Scenario 12.5. What is the reorder point R to satisfy a 98% cycleservice level? a. Less than or equal to 1,500 units b. Greater than 1,500 units but less than or equal to 1,600 units c. Greater than 1,600 units but less than or equal to 1,700 units d. Greater than 1,700 units Reference: Inventory Control Systems Difficulty: Moderate Keywords: reorder point, cycle-service level
65.
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Chapter 12 Inventory Management
66.
Use the information in Scenario 12.5. What service level does a reorder point of 1,524 imply? a. Less than or equal to 50% b. Greater than 50% but less than or equal to 55% c. Greater than 55% but less than or equal to 60% d. Greater than 60% Reference: Inventory Control Systems Difficulty: Moderate Keywords: service level, reorder point Use the information in Scenario 12.5. If lead-time increases by three days, what is the reorder point needed to maintain a 98% service level? a. Less than or equal to 2,400 units b. Greater than 2,400 units but less than 2,500 units c. Greater than 2,500 units but less than 2,600 units d. Greater than 2,600 units Reference: Inventory Control Systems Difficulty: Moderate Keywords: lead time, reorder point, service level Use the information in Scenario 12.5. What is the cost of holding the safety stock necessary to maintain the 98% service level? a. Less than or equal to $30 b. Greater than $30 but less than $40 c. Greater than $40 but less than $50 d. Greater than $50 Reference: Inventory Control Systems Difficulty: Moderate Keywords: safety stock, service level Use the information in Scenario 12.5. What is the standard deviation of demand throughout the five-day lead-time period? a. About 45 units b. About 67 units c. About 103 units d. About 200 units Reference: Inventory Control Systems Difficulty: Moderate Keywords: standard deviation of demand, lead time
67.
68.
69.
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Chapter 12 Inventory Management
70.
Use the information in Scenario 12.5. What combination of changes in lead-time and service level would result in exactly the same level of safety stock as indicated in the table? a. Lead-time drops to 41 days and service level increases to 99%. b. Lead-time increases to 18.52 days and service level drops to 92%. c. Lead-time increases to 20.54 days and service level drops to 90%. d. Lead-time drops to 3.5 days and service level increases to 99.54%. Reference: Inventory Control Systems Difficulty: Hard Keywords: standard deviation of demand, lead time, service level, safety stock, stockout
Scenario 12.6 A company operating under a continuous review system has an average demand of 50 units per week for the item it produces. The standard deviation in weekly demand is 20 units. The leadtime for the item is six weeks, and it costs the company $30 to process each order. The holding cost for each unit is $10 per year. The company operates 52 weeks per year. A normal distribution table is appended to this exam.
71.
Use the information in Scenario 12.6. What is the economic order quantity (EOQ) for this item? a. Less than or equal to 175 units b. Greater than 175 units but less than or equal to 200 units c. Greater than 200 units but less than or equal to 225 units d. Greater than 225 units Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity Use the information in Scenario 12.6. What is the desired safety stock level if the company has a policy of maintaining a 90% cycle-service level? a. Less than or equal to 50 units b. Greater than 50 but less than or equal to 100 units c. Greater than 100 but less than or equal to 150 units d. Greater than 150 units Reference: Inventory Control Systems Difficulty: Moderate Keywords: safety stock, cycle-service level, reorder
72.
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Chapter 12 Inventory Management
88. Use the information in Scenario 12.6. What is the reorder point if the company
finally decides to implement a 95 percent cycle-service level? e. Less than or equal to 300 units f.Greater than 300 but less than or equal to 325 units g. Greater than 325 but less than or equal to 350 units h. Greater than 350 units Reference: Inventory Control Systems Difficulty: Moderate Keywords: reorder point, safety stock, cycle-service level Scenario 12.7 You are the operations manager of a firm that uses the continuous-review inventory control system. Suppose the firm operates 52 weeks a year, 365 days, and has the following characteristics for its primary item: Demand = 25,000 units/year Ordering cost = $30/order Holding cost = $8/unit/year Lead time = 2 weeks Standard deviation in weekly demand = 100 units A normal distribution table is appended to this exam.
73.
Use the information in Scenario 12.7. What safety stock level provides a 95% cycleservice level? a. Less than or equal to 150 units b. Greater than 150 but less than or equal to 200 units c. Greater than 200 but less than or equal to 250 units d. Greater than 250 units Reference: Inventory Control Systems Difficulty: Moderate Keywords: safety stock, cycle-service level Use the information in Scenario 12.7. What is the economic order quantity for this item? a. Less than or equal to 400 units b. Greater than 400 but less than or equal to 450 units c. Greater than 450 but less than or equal to 500 units d. Greater than 500 units Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity
74.
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Chapter 12 Inventory Management
75.
Use the information in Scenario 12.7. How many orders per year does the company place if they order the economic order quantity each time? a. Less than or equal to 70 units b. Greater than 70 but less than or equal to 80 units c. Greater than 80 but less than or equal to 90 units d. Greater than 90 units Reference: Economic Order Quantity Difficulty: Moderate Keywords: orders per year, EOQ, economic order quantity Use the information in Scenario 12.7. What is the length of their order cycle if they order the economic order quantity each time? a. Less than or equal to 4 days b. Greater than 4 days but less than or equal to 5 days c. Greater than 5 days but less than or equal to 6 days d. Greater than 6 days Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, order cycle, TBO Use the information in Scenario 12.7. If the company desires a 95% service level, how many times per year will they stock out if they order the economic order quantity each time? a. Less than or equal to 3 times b. Greater than 3 times but less than or equal to 4 times c. Greater than 4 times but less than or equal to 5 times d. Greater than 5 times Reference: Economic Order Quantity, Inventory Control systems Difficulty: Moderate Keywords: EOQ, stock out, service level, ROP Use the information in Scenario 12.7. What is the reorder point for this item if they use a 95% service level? a. 1,046 units b. 170 units c. 1,194 units d. 68 units Reference: Economic Order Quantity, Inventory Control systems Difficulty: Moderate Keywords: ROP, reorder point, service level
76.
77.
78.
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Chapter 12 Inventory Management
79.
Use the information in Scenario 12.7. What is the annual cost of holding safety stock for this item if they use a 90% service level? a. Less than or equal to $1,500 b. Greater than $1,500 but less than or equal to $1,550 c. Greater than $1,550 but less than or equal to $1,600 d. Greater than $1,600 Reference: Economic Order Quantity, Inventory Control systems Difficulty: Moderate Keywords: safety stock, service level, holding cost Use the information in Scenario 12.7. If this firm uses an EOQ model for purchase decisions, which change would result in the biggest increase in order quantity over the order quantity determined with the original data? a. The cost of ordering rises to $50 per order. b. The holding cost drops to $5 per unit per year. c. The annual demand soars to 30,000 units per year. d. The lead-time increases to three months. Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity Use the information in Scenario 12.7. What is the total cost (ordering and carrying) if the company orders the economic order quantity for this item? a. Less than or equal to $3,000 b. Greater than $3,000 but less than or equal to $3,200 c. Greater than $3,200 but less than or equal to $3,400 d. Greater than $3,400 Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, holding cost, ordering cost
80.
81.
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Chapter 12 Inventory Management
Scenario 12.8 Peterson Enterprises uses a continuous review inventory control system. The firm operates 50 weeks per year and has the following characteristics for an item: Demand = 50,000 units/year Ordering cost = $35/order Holding cost = $2/unit/year Lead-time = 3 weeks Standard deviation in weekly demand = 125 units A normal distribution table is appended to this exam.
82.
Use the information in Scenario 12.8. What is the EOQ for this item? a. Less than or equal to 1,100 units b. Greater than 1,100 but less than or equal to 1,200 units c. Greater than 1,200 but less than or equal to 1,300 units d. More than 1,300 units Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity Use the information in Scenario 12.8. If Peterson wishes to provide a 90% cycle-service level, what is the reorder point? a. Less than or equal to 2,700 units b. Greater than 2,700 but fewer than or equal to 3,100 units c. Greater than 3,100 but fewer than or equal to 3,500 units d. Greater than 3,500 units Reference: Inventory Control Systems Difficulty: Moderate Keywords: ROP, reorder point, cycle-service level
83.
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Chapter 12 Inventory Management
84.
Cynthia Korinsky, manager of a large medical supply house that operates 50 weeks per year and five days per week, has decided to implement a periodic review system for all class A SKUs. One such SKU has the following characteristics: Demand = 10,000 units per year (or 40 units per workday) Order cost = $50 per order Holding cost = $5 per unit per year If Korinsky wishes to minimize total cost (thereby approximating the EOQ), the number of workdays between orders (or P), should be: a. less than or equal to 10 days. b. greater than 10 days but less than or equal to 12 days. c. greater than 12 days but less than or equal to 14 days. d. greater than 14 days. Reference: Inventory Control Systems Difficulty: Moderate Keywords: EOQ, economic order quantity, periodic review, P, order cycle
Scenario 12.9 Demand = 5,200 units/year Standard deviation of weekly demand = 11 units Ordering costs = $45/order Holding costs = $2/unit/year Cycle-service level = 90% (z for 90% = 1.28) Lead-time = 3 weeks Number of weeks per year = 52 weeks
85.
Use the information in Scenario 12.9. If a firm uses the continuous review system to control the inventory, what would be the reorder point? a. 0 units b. Greater than 0 but less than or equal to 300 units c. Greater than 300 but less than or equal to 600 units d. Greater than 600 units Reference: Inventory Control Systems Difficulty: Moderate Keywords: reorder point, continuous review
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Chapter 12 Inventory Management
86.
Use the information in Scenario 12.9. The firm decided to change to the periodic review system to control the items inventory. For the most recent review, an inventory clerk checked the inventory of this item and found 500 units. There were no scheduled receipts at the time. How many units should be ordered? (HINT: Use the EOQ model to derive P, the time between reviews.) a. 0 units b. Greater than 0 but less than or equal to 300 units c. Greater than 300 but less than or equal to 600 units d. Greater than 600 units Reference: Inventory Control Systems Difficulty: Hard Keywords: EOQ, economic order quantity, periodic review, P, reorder Your firm uses a continuous review system (Q system), in which the inventory position is updated after every transaction. The firm operates 52 weeks per year. One of the items has the following characteristics: Demand = 14,560 units per year Ordering cost = $40 per order Holding cost = $6 per unit per year Lead-time = 2 weeks Standard deviation in weekly demand = 100 units Cycle-service level = 80% If Q is made equal to the EOQ, what are the desired values for Q and R? a. Q is between 65 and 69, and R is between 398 and 402. b. Q is between 65 and 69, and R is between 362 and 366. c. Q is between 439 and 443, and R is between 678 and 682. d. Q is between 439 and 443, and R is between 559 and 563. Reference: Multiple sections Difficulty: Moderate Keywords: continuous review (Q) system, reorder, R, EOQ, economic order quantity
87.
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Chapter 12 Inventory Management
Scenario 12.10 Demand = 52,000 units/year Standard deviation of weekly demand = 110 units Ordering costs = $45/order Holding costs = $0.50/unit/year Cycle-service level = 90% Lead time = 2 weeks Number of weeks per year = 52 weeks A normal distribution table is appended to this exam.
88.
Use the information in Scenario 12.10. A firm uses the periodic review system to control the item depicted above. It reviews the items status every three weeks ( P = 3). At the most recent inventory review, an inventory clerk found 1,500 units. There were no scheduled receipts and no backorders. How many units should be ordered? (Hint: You must calculate T before answering this question.) a. 0 units b. Greater than 0 but less than or equal to 3,750 units c. Greater than 3,750 but less than or equal to 4,000 units d. Greater than 4,000 units Reference: inventory control systems Difficulty: Moderate Keywords: periodic review system, P, scheduled receipts, backorders, order quantity Use the information in Scenario 12.10. If the firm changed to a continuous review system, what would be the reorder point? a. 0 units b. Greater than 0 but less than or equal to 1,000 units c. Greater than 1,000 but less than or equal to 2,000 units d. Greater than 2,000 units Reference: Inventory Control Systems Difficulty: Moderate Keywords: continuous review, reorder point Use the information in Scenario 12.10. What is the EOQ for this item? a. Greater than 0 but less than or equal to 1,500 units b. Greater than 1,500 but less than or equal to 3,000 units c. Greater than 3,000 but less than or equal to 4,500 units d. Greater than 4,500 units Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity
89.
90.
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Chapter 12 Inventory Management
91.
Jan Tuttle is the inventory manager of an art supply store. She uses a periodic review system for all oil paints. The number of periods between orders (P) for red #68 is 15 workdays. (The store operates 50 weeks per year, five workdays per week.) Additional information concerning red #68 follows. Demand = 30 units/workday Standard deviation of daily demand = 4 units/workday Lead-time = 7 workdays Desired cycle-service level = 85% A normal distribution table is appended to this exam. What is the target inventory level T for red #68? a. Less than or equal to 550 units b. Greater than 550 but less than or equal to 600 units c. Greater than 600 but less than or equal to 650 units d. Greater than 650 units Reference: Inventory Control Systems Difficulty: Moderate Keywords: T, target inventory, P, periodic review system
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Scenario 12.11 The Hastings Company is a nation-wide wholesaler for small electronic devices. One of its most popular items is a calculator, the Whizz-Bang 1100. Hastingss demand, lead time and cycle service requirements for the W-B 1100 are as follows: Demand = 25,000 units/year Number of weeks per year = 50 weeks Standard deviation of weekly demand = 100 units Average lead time = 6 weeks Standard deviation of lead time: 2 weeks Cycle-service level = 85% Hastings uses a continuous review system to control inventory. A normal distribution table is appended to this exam. Use the information in Scenario 12.11. What is the standard deviation of demand during lead time? a. Greater than 0 but less than or equal to 100 units b. Greater than 100 but less than or equal to 500 units c. Greater than 500 but less than or equal to 1,000 units d. Greater than 1,000 but less than or equal to 1,500 units e. Greater than 1,500 units Reference: Inventory Control Systems Difficulty: Moderate Keywords: continuous review system, variable demand, variable lead time, standard deviation during lead time Use the information in Scenario 12.11. What safety stock should Hastings use for the Whizz-Bang 1100? a. Greater than 0 but less than or equal to 100 units b. Greater than 100 units but less than or equal to 500 units c. Greater than 500 units but less than or equal to 1,500 units d. Greater than 1,500 units but less than or equal to 2,500 units e. Greater than 2,500 units Reference: Inventory Control Systems Difficulty: Moderate Keywords: continuous review system, variable demand, variable lead time, safety stock
92.
93.
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94.
Use the information in Scenario 12.11. What reorder point should Hastings use for the Whizz-Bang 1100? a. Greater than 0 but less than or equal to 1,200 units b. Greater than 1,200 units but less than or equal to 2,400 units c. Greater than 2,400 units but less than or equal to 3,600 units d. Greater than 3,600 units but less than or equal to 4,800 units e. Greater than 4,800 units Reference: Inventory Control Systems Difficulty: Moderate Keywords: continuous review system, variable demand, variable lead time, reorder point Use the information in Scenario 12. 11. If Hastings decides to increase its cycle-service level to 90%, what is the new reorder point if all other parameters remain the same for the Whizz-Bang 1100? a. Greater than 0 but less than or equal to 1,500 units b. Greater than 1,500 units but less than or equal to 3,000 units c. Greater than 3,000 units but less than or equal to 4,500 units d. Greater than 4,500 units but less than or equal to 6,000 units e. Greater than 6,000 units Reference: Inventory Control Systems Difficulty: Moderate Keywords: continuous review system, variable demand, variable lead time, reorder point
95.
Scenario 12.12 Demand = 50,000 units/week Standard deviation of weekly demand = 15,000 units Average lead time = 8 weeks Standard deviation of lead time: 3 weeks Cycle-service level = 80% A continuous review system is used to control inventory. A normal distribution table is appended to this exam.
96.
Use the information in Scenario 12.12. What is the standard deviation of demand during lead time? a. Greater than 0 but less than or equal to 100,000 units b. Greater than 100,000 units but less than or equal to 200,000 units c. Greater than 200,000 units but less than or equal to 300,000 units d. Greater than 300,000 units Reference: Inventory Control Systems Difficulty: Moderate Keywords: continuous review system, variable demand, variable lead time, standard deviation during lead time
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Chapter 12 Inventory Management
97.
Use the information in Scenario 12.12. What safety stock should the firm use for this product? a. Greater than 0 but less than or equal to 50,000 units b. Greater than 50,000 units but less than or equal to 100,000 units c. Greater than 100,000 units but less than or equal to 150,000 units d. Greater than 150,000 units but less than or equal to 200,000 units e. Greater than 200,000 units Reference: Inventory Control Systems Difficulty: Moderate Keywords: continuous review system, variable demand, variable lead time, safety stock Use the information in Scenario 12.12. What reorder point should the firm use for this product? a. Greater than 0 but less than or equal to 150,000 units b. Greater than 150,000 units but less than or equal to 300,000 units c. Greater than 300,000 units but less than or equal to 400,000 units d. Greater than 400,000 units but less than or equal to 500,000 units e. Greater than 500,000 units Reference: Inventory Control Systems Difficulty: Moderate Keywords: continuous review system, variable demand, variable lead time, reorder point Use the information in Scenario 12.12. If the firm decides to increase its cycle-service level to 90%, what is the new reorder point if all other parameters remain the same for this product? a. Greater than 550,000 units b. Greater than 400,000 units but less than or equal to 550,000 units c. Greater than 250,000 units but less than or equal to 400,000 units d. Greater than 150,000 units but less than or equal to 250,000 units e. Greater than 0 but less than or equal to 150,000 units Reference: Inventory Control Systems Difficulty: Moderate Keywords: continuous review system, variable demand, variable lead time, reorder point
98.
99.
Scenario 12.13 Demand = 100,000 units/year Number of days per year = 250 weeks Standard deviation of weekly demand = 50 units Average lead time = 5 days Standard deviation of lead time: 2 days Cycle-service level = 99% A continuous review system is used to control inventory. A normal distribution table is appended to this exam.
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Chapter 12 Inventory Management
100.
Use the information in Scenario 12.13. What is the standard deviation of demand during lead time? a. Greater than 0 but less than or equal to 500 units b. Greater than 500 units but less than or equal to 1,500 units c. Greater than 1,500 units but less than or equal to 2,500 units d. Greater than 2,500 units Reference: Inventory Control Systems Difficulty: Moderate Keywords: continuous review system, variable demand, variable lead time, standard deviation during lead time Use the information in Scenario 12.13. What safety stock should the firm use for this product? a. Greater than 0 but less than or equal to 500 units b. Greater than 500 units but less than or equal to 1,500 units c. Greater than 1,500 units but less than or equal to 2,500 units d. Greater than 2,500 units Reference: Inventory Control Systems Difficulty: Moderate Keywords: continuous review system, variable demand, variable lead time, safety stock Use the information in Scenario 12.13. What reorder point should the firm use for this product? a. Greater than 4,500 units b. Greater than 3,500 units but less than or equal to 4,500 units c. Greater than 2,500 units but less than or equal to 3,500 units d. Greater than 1,500 units but less than or equal to 2,500 units e. Greater than 0 but less than or equal to 1,500 units Reference: Inventory Control Systems Difficulty: Moderate Keywords: continuous review system, variable demand, variable lead time, reorder point Use the information in Scenario 12.13. If the firm decides to reduce its cycle-service level to 95%, what is the new reorder point if all other parameters remain the same for this product? a. Greater than 4,500 units b. Greater than 3,500 units but less than or equal to 4,500 units c. Greater than 2,500 units but less than or equal to 3,500 units d. Greater than 1,500 units but less than or equal to 2,500 units e. Greater than 0 but less than or equal to 1,500 units Reference: Inventory Control Systems Difficulty: Moderate Keywords: continuous review system, variable demand, variable lead time, reorder point
101.
102.
103.
PROBLEMS
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Chapter 12 Inventory Management
104.
An assistant manager is reviewing the costs associated with the stores best-selling product. The data available follows. Demand = 500 units/year Order cost = $40/order Holding cost = $7/unit/year
a. What is the EOQ and its associated ordering and holding costs?
b. If annual demand doubles and all other costs remain the same, what is the new EOQ and total annual cost?
Qopt =
2 DS 2(500)40 = = 75.59 units H 7
Q 75.59 H= 7 = $264.575 2 2 D 500 S= (40) = $264.575 Ordering cost = Q 75.59
Holding cost = b.
Qopt =
2 DS 2(1000)40 = = 106.9 units H 7 Q D 106.9 1000 H+ S= 7+ 40 = $748.33 2 Q 2 106.9
Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic order quantity, ordering cost, holding, cost
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Chapter 12 Inventory Management
105.
An assistant manager is reviewing the costs associated with one of the stores betterselling products. The data available follows. Demand = 400 units/year Order cost = $25/order Holding cost = 50/unit/year a. They currently order a one-year supply. What are the total annual ordering cost and holding cost for this order size? b. What would be the EOQ and its associated ordering and holding costs?
Q 400 H= 0.5 = $100 2 2 D 400 S= (25) = $25 Ordering cost = Q 400
Holding cost = Total Cost = b.
Q D 400 400 H+ S= .5 + 25 = $125 2 Q 2 400
Qopt =
2 DS 2(400)25 = = 200 H 0.50 Q 200 H= 0.5 = $50 2 2 D 400 S= (25) = $50 Q 200
Holding cost =
Ordering cost =
Reference: Economic Order Quantity Difficulty: Moderate Keywords: economic order quantity, holding cost, ordering, cost
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Chapter 12 Inventory Management
106.
Jimmys Egg is a specialty restaurant featuring 47 different kinds of omelettes in three different sizes. They use 60 dozen eggs a day that they order from an egg factory with a lead time of five days. One fine day they stock their chiller and note that there are only 25 dozen eggs remaining. They have a backorder of 15 cases and an open order of 200 cases. What is their inventory position? Should they place an order? Answer:
IP = OH + SR BO IP = 25 + 200 15 IP = 210
with no safety stock Their inventory position falls short of their reorder point so they should place an order. Reference: Inventory Control Systems Difficulty: Hard Keywords: order quantity, reorder point, inventory position
R = Demand during lead time R = 60 5 = 300
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Chapter 12 Inventory Management
107.
A store has collected the following information on one of its products: Demand = 4,500 units/year Standard deviation of weekly demand = 12 units Ordering costs = $40/order Holding costs = $3/unit/year Cycle-service level = 90% (z for 90% = 1.28) Lead-time = 2 weeks Number of weeks per year = 52 weeks a. If a firm uses the continuous review system to control the inventory, what would be the order quantity and reorder point? b. The firm decided to change to the periodic review system to control the items inventory. For the most recent review, an inventory clerk checked the inventory of this item and found 300 units. There were no scheduled receipts or backorders at the time. How many units should be ordered? (HINT: Use the EOQ model to derive P, the time between reviews.)
Qopt =
2 DS = H
2( 4500)40 = 346.4 346 units 3
R = d L + z dLT = (4500/52)2 + 1.28(12 2) = 173.08 + 21.72 = 194.8
195 units b.
TBOEOQ =
EOQ 346.4 (52 weeks/year) = (52) = 4.00 weeks D 4500
T = d ( P + L ) + z P + L =
557
4500 (4 + 2) + 1.28(12) (4 + 2) = 519.23 + 37.62 = 556.85 52 Order quantity = T IP = 557 300 = 257 units
Reference: Inventory Control Systems Difficulty: Hard Keywords: continuous review, order quantity, reorder quantity, reorder point, TBO, target inventory level
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Chapter 12 Inventory Management
108.
A store has collected the following information on one of its products: Demand = 10,000 units/year Standard deviation of weekly demand = 25 units Ordering costs = $30/order Holding costs = $4/unit/year Cycle-service level = 95% (z for 95% = 1.65) Lead-time = 2 weeks Number of weeks per year = 50 weeks a. If a firm uses the continuous review system to control the inventory, what would be the order quantity and reorder point?
b. The firm decided to change to the periodic review system to control the items
inventory. For the most recent review, an inventory clerk checked the inventory of this item and found 200 units. There were no scheduled receipts or backorders at the time. How many units should be ordered? (HINT: Use the EOQ model to derive P, the time between reviews.)
Qopt =
2 DS = H
2(10000)30 = 387.30 387 units 4
R = d L + z dLT = (10,000/50)2 + 1.65(25 2) = 400.00 + 58.34 = 458.34 458 units
b.
TBOEOQ =
weeks
EOQ 387.3 (50 weeks/year) = (50) = 1.94 weeks D 10000
2
T = d ( P + L) + z P + L =
10000 (2 + 2) + 1.65(25) (2 + 2) = 800.00 + 82.50 = 883.00 50
units
Order quantity = T IP = 883 200 = 683 units Reference: Inventory Control Systems Difficulty: Hard Keywords: continuous review, order quantity, reorder quantity, reorder point, time between orders, target inventory level
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Chapter 12 Inventory Management
109.
The Hastings Company is a nation-wide wholesaler for small electronic devices. One of its most popular items is a new GPS unit called the WAMI-1000. Hastings has gathered the following information, and has asked you to develop a continuous review inventory control system for this item: Order quantity for each order placed with manufacturer = 10,000 units Average demand = 1,000 units/week Standard deviation of weekly demand = 200 units Average lead time = 5 weeks Standard deviation of lead time: 1.5 weeks Cycle-service level = 90% (z for 90% = 1.28)
a. What is the standard deviation of demand during lead time?
b. What is the safety stock level that should be carried for the WAMI-1000? c. What is the reorder point for the WAMI-1000? d. Summarize the actions Hastings should take using your new inventory system. e. If Hastings decides to increase its cycle-service level to from 90% to 95% ( z for 95% = 1.65), how does this change the actions that should take? 2
2 2 dLT = L d + d LT = (5)(200) 2 + (1,000) 2 (1.5) 2 = 4,250,000 = 1,565.25 1,565 un
b.
Safety Stock = z dLT = (1.28)(1,565) = 2,003 units
c.
Re order Po int = d L + Safety Stock = (1,000)(5) + 2,003 = 7,003 units
d. When the inventory level of the model WAMI-1000 reaches the reorder point of 7,003 units,
Hastings should place an order with the manufacturer for 10,000 units.
e. At cycle-service level of 95%, z = 1.65 New Safety Stock = z dLT = (1.65)(1,565) = 2,582 units
New Re order Po int = d L + Safety Stock = (1,000)(5) + 2,582 = 7,582 units
Hastings should now place a new order with the manufacturer for 10,000 units when the inventory level of the WAMI-1000 reaches the higher reorder point of 7,582 units. Reference: Inventory Control Systems Difficulty: Moderate Keywords: continuous review system, variable demand, variable lead time, standard deviation during lead time, safety stock, reorder point
290 Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Chapter 12 Inventory Management
110.
The Hastings Company is a nation-wide wholesaler for small electronic devices. One of its most popular items is a new GPS unit called the WAMI-1000. Hastings has gathered the following information, and has asked you to develop a continuous review inventory control system for this item: Order quantity for each order placed with manufacturer = 50,000 units Average demand = 5,000 units/week Standard deviation of weekly demand = 1,000 units Average lead time = 4 weeks Standard deviation of lead time: 1 week Cycle-service level = 90% (z for 90% = 1.28)
a. What is the standard deviation of demand during lead time?
b. What is the safety stock level that should be carried for the WAMI-1000? c. What is the reorder point for the WAMI-1000? d. Summarize the actions Hastings should take using your new inventory system. e. If Hastings decides to increase its cycle-service level to from 90% to 99% ( z for 99% = 2.33), how does this change the actions that should take? 2 2 dLT = L d + d LT = (4)(1000) 2 + (5,000) 2 (1) 2 = 29,000,000 = 5,385.16 5,385 units 2
b.
Safety Stock = z dLT = (1.28)(5,385) = 6,893 units
c.
Re order Po int = d L + Safety Stock = (5,000)(4) + 6,893 = 26,893 units
When the inventory level of the model WAMI-1000 reaches the reorder point of 26,893 units, Hastings should place an order with the manufacturer for 50,000 units. e. At cycle-service level of 99%, z = 2.33
d.
New Safety Stock = z dLT = ( 2.33)(5,385) = 12,547 units
New Re order Po int = d L + Safety Stock = (5,000)(4) + 12,547 = 32,547 units
Hastings should now place a new order with the manufacturer for 50,000 units when the inventory level of the WAMI-1000 reaches the higher reorder point of 32,547 units. Reference: Inventory Control Systems Difficulty: Moderate Keywords: continuous review system, variable demand, variable lead time, standard deviation during lead time, safety stock, reorder point
291 Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Chapter 12 Inventory Management
NORMAL DISTRIBUTION TABLE
.0 .1 .2 .3 .4 .5 .6 .7 .8 .9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 3.0 3.1 3.2 3.3 3.4
0 .00 .5000 .5398 .5793 .6179 .6554 .6915 .7257 .7580 .7881 .8159 .8413 .8643 .8849 .9032 .9192 .9332 .9452 .9554 .9641 .9713 .9772 .9821 .9861 .9893 .9918 .9938 .9953 .9965 .9974 .9981 .9987 .9990 .9993 .9995 .9997
z .01 .5040 .5438 .5832 .6217 .6591 .6950 .7291 .7611 .7910 .8186 .8438 .8665 .8869 .9049 .9207 .9345 .9463 .9564 .9649 .9719 .9778 .9826 .9864 .9896 .9920 .9940 .9955 .9966 .9975 .9982 .9987 .9991 .9993 .9995 .9997
+
.02 .5080 .5478 .5871 .6255 .6628 .6985 .7324 .7642 .7939 .8212 .8461 .8686 .8888 .9066 .9222 .9357 .9474 .9573 .9656 .9726 .9783 .9830 .9868 .9898 .9922 .9941 .9956 .9967 .9976 .9982 .9987 .9991 .9994 .9995 .9997
.03 .5120 .5517 .5910 .6293 .6664 .7019 .7357 .7673 .7967 .8238 .8485 .8708 .8907 .9082 .9236 .9370 .9484 .9582 .9664 .9732 .9788 .9834 .9871 .9901 .9925 .9943 .9957 .9968 .9977 .9983 .9988 .9991 .9994 .9996 .9997
.04 .5160 .5557 .5948 .6331 .6700 .7054 .7389 .7704 .7995 .8264 .8508 .8729 .8925 .9099 .9251 .9382 .9495 .9591 .9671 .9738 .9793 .9838 .9875 .9904 .9927 .9945 .9959 .9969 .9977 .9984 .9988 .9992 .9994 .9996 .9997
.05 .5199 .5596 .5987 .6368 .6736 .7088 .7422 .7734 .8023 .8289 .8531 .8749 .8944 .9115 .9265 .9394 .9505 .9599 .9678 .9744 .9798 .9842 .9878 .9906 .9929 .9946 .9960 .9970 .9978 .9984 .9989 .9992 .9994 .9996 .9997
.06 .5239 .5636 .6026 .6406 .6772 .7123 .7454 .7764 .8051 .8315 .8554 .8770 .8962 .9131 .9279 .9406 .9515 .9608 .9686 .9750 .9803 .9846 .9881 .9909 .9931 .9948 .9961 .9971 .9979 .9985 .9989 .9992 .9994 .9996 .9997
.07 .5279 .5675 .6064 .6443 .6808 .7157 .7486 .7794 .8078 .8340 .8577 .8790 .8980 .9147 .9292 .9418 .9525 .9616 .9693 .9756 .9808 .9850 .9884 .9911 .9932 .9949 .9962 .9972 .9979 .9985 .9989 .9992 .9995 .9996 .9997
.08 .5319 .5714 .6103 .6480 .6844 .7190 .7517 .7823 .8106 .8365 .8599 .8810 .8997 .9162 .9306 .9429 .9535 .9625 .9699 .9761 .9812 .9854 .9887 .9913 .9934 .9951 .9963 .9973 .9980 .9986 .9990 .9993 .9995 .9996 .9997
.09 .5359 .5753 .6141 .6517 .6879 .7224 .7549 .7852 .8133 .8389 .8621 .8830 .9015 .9177 .9319 .9441 .9545 .9633 .9706 .9767 .9817 .9857 .9890 .9916 .9936 .9952 .9964 .9974 .9981 .9986 .9990 .9993 .9995 .9997 .9998
292 Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

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