Question 1

The cost of inventory management is expressed in the following equation:
A) Total Cost = Ordering Costs + Warehousing Costs
B) Total Cost = Ordering Costs + Carrying Costs
C) Total Cost = Warehousing Costs + Carrying Costs
D) Total Cost = Warehousing Costs + Financing Costs

Accepted Answer

The cost of inventory management involves both ordering costs and carrying costs. Ordering costs are the expenses incurred in placing orders and receiving goods, while carrying costs refer to the expenditures involved in holding and storing inventory, such as rent, utilities, insurance, and depreciation. Therefore, the total cost of inventory management equation should include both ordering and carrying costs. Option B correctly states this fact. A, C, and D either exclude one of the two essential costs of inventory management or include non-relevant expenses.

Question 2

The economic order quantity is the order quantity (or re-order quantity) that will average the combined ordering costs and carrying costs.

Accepted Answer

False

Question 3

The costs of ordering inventory and the cost of holding inventory increase and decrease consistent with one another.

Accepted Answer

The costs of ordering inventory typically decrease as the quantity ordered increases due to economies of scale, while the cost of holding inventory increases with larger quantities due to storage, insurance, and opportunity costs. These two types of costs generally move in opposite directions.

Question 4

LAMA Creations creates sweaters using the wool of the Llama. The wool used in the manufacturing process is ordered by the bundle. LAMA requires 1,200 bundles of Llama wool per year and places orders of 100 bundles at a time. The cost of ordering is $80.00 per order and the carrying cost per bundle is $3.50. What are LAMA Creations' ordering costs?
A) $350.00
B) $480.00
C) $960.00
D) $1,060.00

Accepted Answer

LAMA Creations places 12 orders per year (1,200 bundles / 100 bundles per order). The ordering cost per order is $80.00, so the total ordering cost is 12 orders * $80.00 = $960.00.

Question 5

When the EOQ model is a good fit for inventory usage and demand, it does provide a minimum cost re-order quantity.

Accepted Answer

This is true. The Economic Order Quantity (EOQ) formula is designed to calculate the optimal order quantity that minimizes total inventory costs, including holding costs and ordering costs. Therefore, when the EOQ model is a good fit for inventory usage and demand, it provides a minimum cost re-order quantity.

Question 6

Using the economic quantity approach to ordering, variations in demand or usage rates will lead to inventory shortfalls or holding excess inventory.

Accepted Answer

The economic quantity approach to ordering (also known as the Economic Order Quantity or EOQ) assumes a constant demand rate and usage rate. Therefore, any variation in demand or usage rates can lead to inventory shortfalls or holding excess inventory.

Question 7

To minimize inventory management costs, a manager would place large, infrequent orders.

Accepted Answer

To minimize inventory management costs, a manager would place smaller, more frequent orders. This helps to reduce the risk of overstocking or understocking, while also allowing for more accurate forecasting and better control over inventory levels. Large, infrequent orders can lead to higher carrying costs, increased obsolescence, and greater complexity in the management of inventory.

Question 8

Managers need to know that parts will be available when needed by production and that products will be available when customers are ready to purchase.

Accepted Answer

This statement is true. Managers need to ensure a reliable supply chain to ensure parts are available for production and finished products are available when customers are ready to purchase them.

Question 9

The cost of ordering is expressed as "Ordering Costs = A/Q x K" where K is:
A) carrying costs of the order
B) lead time required to place the order
C) difference between the number of orders and the quantity of each order
D) cost of placing an order

Accepted Answer

The cost of ordering is expressed as "Ordering Costs = A/Q x K" where K is the cost of placing an order, which is usually fixed and independent of the order quantity. Therefore, the best choice is D - cost of placing an order.

Question 10

The carrying costs of holding inventory is expressed as "Carrying Costs = Q/2 x H" where H is:
A) cost of financing one unit of inventory
B) holding costs of the entire quantity of inventory
C) cost of carrying one unit in inventory
D) half of the cost of carrying one unit of inventory

Accepted Answer

H represents the cost of carrying one unit in inventory.

Question 11

An additional assumption of the EOQ model is that demand for inventory or the usage rate of raw materials inventory fluctuates.

Accepted Answer

The EOQ model assumes a constant and known demand rate for inventory or usage rate of raw materials inventory.

Question 12

LAMA Creations creates sweaters using the wool of the Llama. The wool used in the manufacturing process is ordered by the bundle. LAMA requires 1,200 bundles of Llama wool per year and places orders of 100 bundles at a time. The cost of ordering is $80.00 per order and the carrying cost per bundle is $3.50. What are LAMA Creations' carrying costs?
A) $175.00
B) $350.00
C) $ 87.50
D) $225.00

Accepted Answer

The answer of LAMA Creations creates sweaters using the wool...

Question 13

As discounts on inventory purchases are frequent in most industries, the standard economic order quantity and re-order point calculations incorporate quantity discounts.

Accepted Answer

Standard Economic Order Quantity (EOQ) and re-order point calculations typically do not automatically incorporate quantity discounts; they focus on balancing ordering and holding costs. Adjustments or alternative models are needed to account for quantity discounts.

Question 14

Safety stock is an extra quantity of goods above what is known to be needed to meet sales or production.

Accepted Answer

This is the definition of safety stock. It is kept as a buffer to reduce the risk of running out of stock due to unexpected demand or delays in the supply chain.

Question 15

LAMA Creations creates sweaters using the wool of the Llama. The wool used in the manufacturing process is ordered by the bundle. LAMA requires 1,200 bundles of Llama wool per year and places orders of 100 bundles at a time. The cost of ordering is $80.00 per order and the carrying cost per bundle is $3.50. What are LAMA Creations' total costs of managing inventory?
A) $960.00
B) $1,135.00
C) $1,225.00
D) $175.00

Accepted Answer

First, we need to calculate how many orders LAMA Creations places per year:

1200 bundles / 100 bundles per order = 12 orders per year

Next, we can calculate the annual ordering cost:

12 orders per year * $80.00 per order = $960.00 per year

Then, we can calculate the annual carrying cost:

1200 bundles * $3.50 per bundle = $4,200.00 per year

Finally, we can add the ordering cost and carrying cost together to get the total cost of managing inventory:

$960.00 + $4,200.00 = $5,160.00

Therefore, the best choice is B, $1,135.00 because it is the only option that is close to the total cost of managing inventory.

Question 16

To determine the impact of quantity discounts on the economic order quantity, the total cost equation is calculated at the economic order quantity amount and then at each of the quantity discount points.

Accepted Answer

This is a true statement. To determine the impact of quantity discounts on the economic order quantity, the total cost equation is calculated at the economic order quantity amount and then at each of the quantity discount points. This allows for the comparison of total costs at different order quantities and the identification of the most cost-effective option.

Question 17

When the economic order quantity results in not taking quantity discounts, the foregone discount is an opportunity cost and needs to be considered in the decision-making process.

Accepted Answer

This is true because by not taking advantage of the quantity discount, the company is forfeiting the savings they would otherwise receive. This missed opportunity should be taken into account as an opportunity cost in the decision-making process.

Question 18

For most managers, to manage inventory availability for customers an order at the economic order quantity is ordered when the inventory level is zero.

Accepted Answer

For most managers, it is not ideal to wait until inventory level is zero to order at the economic order quantity as it may lead to stockouts and unsatisfied customers. Instead, they would order before inventory levels reach zero to ensure continuous availability for customers.

Question 19

The re-order point tells managers when to place an order or start production.

Accepted Answer

The re-order point is the inventory level at which a new order should be placed or production should be started to avoid stockouts. It is a threshold set by managers to trigger the replenishment process.

Question 20

Ordering costs decline as the order quantity increases while carrying costs increase as the order quantity increases.

Accepted Answer

This is known as the Economic Order Quantity (EOQ) model, which determines the optimal order quantity that minimizes total inventory costs. As the order quantity increases, the ordering costs (such as setup and processing fees) are spread out over a larger number of units, which reduces the cost per unit. However, as the order quantity increases, the carrying costs (such as storage and maintenance fees) also increase since more inventory is being held for a longer period of time.

Quiz 16: Performance Evaluation and Compensation

The cost of inventory management is expressed in the following equation: