Deck 10: Inventory Models

Question 1

Annual purchase cost is included in the total cost in

A) the EOQ model.
B) the economic production lot size model.
C) the quantity discount model.
D) all inventory models.

Answer 1

C

Question 2

Periodic review inventory systems

A) are less subject to stockouts than corresponding continuous review systems.
B) require larger safety stock levels than corresponding continuous review systems.
C) have constant order quantities.
D) make the coordination of orders for multiple products more difficult.

Answer 2

B

Question 3

Inventory position is defined as the amount of inventory on hand plus the amount

A) on order
C) on reserve
B) promised to customers
D) to be returned to suppliers

Answer 3

A

Question 4

For inventory systems with constant demand and a fixed lead time,

A) the reorder point = lead-time demand.
B) the reorder point > lead-time demand.
C) the reorder point < lead-time demand.
D) the reorder point is unrelated to lead-time demand.

Question 5

The objective of the EOQ with quantity discounts model is to

A) determine the minimum order quantity required for the maximum discount.
B) balance annual ordering and holding costs.
C) minimize annual purchase cost.
D) minimize the sum of annual carrying, holding, and purchase costs.

Question 6

For the inventory model with planned shortages, the optimal order quantity results in

A) annual holding cost = annual ordering cost.
B) annual holding cost = annual backordering cost.
C) annual ordering cost = annual holding cost + annual backordering cost.
D) annual ordering cost = annual holding cost - annual backordering cost.

Question 7

The economic production lot size model is appropriate when

A) demand exceeds the production rate.
B) there is a constant supply rate for every period, without pause.
C) ordering cost is equivalent to the production setup cost.
D) All of the alternatives are correct.

Question 8

A firm that is presently using the Economic Order Quantity model and is planning to switch to the Economic Production Lot-Size model can expect

A) the Q* to increase
B) the maximum inventory level to increase.
C) the order cycle to decrease.
D) annual holding cost to be less than annual setup cost.

Question 9

Which cost would not be considered part of a holding cost?

A) cost of capital
B) shipping cost
C) insurance cost
D) warehouse overhead

Question 10

Inventory

A) is held against uncertain usage so that a supply of items is available if needed.
B) constitutes a small part of the cost of doing business.
C) is not something that can be managed effectively.
D) All of the alternatives are correct.

Question 11

Inventory position is defined as

A) the amount of inventory on hand in excess of expected demand.
B) the amount of inventory on hand.
C) the amount of inventory on hand plus the amount of inventory on order.
D) None of the alternatives is correct.

Question 12

The definition of service level used in this chapter is

A) the percentage of all demand that can be satisfied from inventory.
B) the percentage of all order cycles that do not experience a stockout.
C) the percentage of demand during the lead-time period that can be satisfied from inventory
D) None of the alternatives is correct.

Question 13

When the reorder point r exceeds Q*, the difference is

A) safety stock
C) surplus inventory
B) one or more outstanding orders
D) backorders

Question 14

In the single-period inventory model with probabilistic demand,

A) surplus items are not allowed to be carried in future inventory.
B) c_o = c_u.
C) probabilities are used to calculate expected losses.
D) All of the alternatives are correct.

Question 15

Inventory models in which the rate of demand is constant are called

A) fixed models.
B) deterministic models.
C) JIT models.
D) requirements models.

Question 16

The maximum inventory with backorders is

A) Q
B) Q - S
C) S
D) (Q - S) / 2

Question 17

Which of the following is not implied when average inventory is Q/2, where Q is the order quantity?

A) An entire order quantity arrives at one time.
B) The previous order quantity is entirely depleted when the next order arrives.
C) An order quantity is depleted at a uniform rate over time.
D) Backorders are permitted.

Question 18

Safety stock

A) can be determined by the EOQ formula.
B) depends on the inventory position.
C) depends on the variability of demand during lead time.
D) is not needed if Q* is the actual order quantity.

Question 19

The EOQ model

A) determines only how frequently to order.
B) considers total cost.
C) minimizes both ordering and holding costs.
D) All of the alternatives are correct.

Question 20

For the EOQ model, which of the following relationships is incorrect?

A) As the order quantity increases, the number of orders placed annually decreases.
B) As the order quantity increases, annual holding cost increases.
C) As the order quantity increases, annual ordering cost increases.
D) As the order quantity increases, average inventory increases.

Question 21

Constant demand is a key assumption of the EOQ model.

Question 22

The cost of overestimating demand is usually harder to determine than the cost of underestimating demand.

Question 23

The terms "inventory on hand" and "inventory position" have the same meaning.

Question 24

For the EOQ model, cycle time is the time between

A) placing successive orders
C) stocking out and receiving an order
B) placing and receiving an order
D) receiving and storing an order

Question 25

When quantity discounts are available, order an amount from the highest discount category.

Question 26

If an item's per-unit backorder cost is greater than its per-unit holding cost, no intentional shortage should be planned.

Question 27

Periodic review systems require smaller safety stock levels than corresponding continuous review systems.

Question 28

An assumption in the economic production lot size model is that there is storage capacity to hold the entire production lot.

Question 29

As lead time for an item increases, the cycle time increases.

Question 30

When there is probabilistic demand in a multi-period model, the inventory level will not decrease smoothly and can fall below 0.

Question 31

Show the total cost expression and calculate the EOQ for an item with holding cost rate 18%, unit cost $8.00, annual demand of 40000, and ordering cost of $48.

Question 32

When demand is independent, it is not related to demand for other components or items produced by the firm.

Question 33

To be considered as inventory, goods must be finished and waiting for delivery.

Question 34

In the EOQ model, the average inventory per cycle over many cycles is Q/2.

Question 35

The single-period inventory model is most applicable to items that are perishable or have seasonal demand.

Question 36

In the periodic review model, the order quantity at each review period must be sufficient to cover demand for the review period plus the demand for the following lead time.

Question 37

The EOQ model is insensitive to small variations or errors in the cost estimates.

Question 38

The time between placing orders is the lead time.

Question 39

At the optimal order quantity for the quantity discount model, the sum of the annual holding and ordering costs is minimized.

Question 40

If the optimal production lot size decreases, average inventory increases.

Question 41

Chez Paul Restaurant orders special Styrofoam "doggy bags" for its customers once a month and lead time is one week. Weekly demand for doggy bags is approximately normally distributed with an average of 120 bags and a standard deviation of 25. Chez Paul wants at most a 3% chance of running out of doggy bags during the replenishment period. If he has 150 bags in stock when he places an order, how many additional bags should he order? What is the safety stock in this case?

Question 42

A weekly sports magazine publishes a special edition for the World Series. The sales forecast is for the number of copies to be normally distributed with mean 800,000 copies and standard deviation 60,000 copies. It costs $.35 to print a copy, and the newsstand price is $1.95. Unsold copies will be scrapped. How many copies should be printed?

Question 43

Bank Drugs sells Jami Michelle lipstick. The Jami Michelle Company offers a 6% discount on orders of at least 500 tubes, a 10% discount on orders of at least 1,000 tubes, a 12% discount on orders of at least 1,800 tubes and a 15% discount on orders at least 2,500 tubes.
Bank sells an average of 40 tubes of Jami Michelle lipstick weekly. The normal price paid by Bank drugs is $1 per tube. If it costs Bank $30 to place an order, and Bank's annual holding cost rate is 27%, determine the optimal order policy for Bank Drugs.