Question 1

Delivery of goods from a supplier is in transit for 14 days. If the annual demand is 2600 units, what is the average annual inventory in transit?

Accepted Answer

To calculate the average annual inventory in transit, we need to first calculate the lead time demand, which is the demand during the lead time (in transit time).

Lead time demand = (Annual demand / 365) x Lead time
Lead time demand = (2600 / 365) x 14
Lead time demand = 99.73 units

The average inventory in transit can be calculated by dividing the lead time demand by 2, as the inventory flows continuously and on average, half of the inventory is in transit at any given time.

Average inventory in transit = Lead time demand / 2
Average inventory in transit = 99.73 / 2
Average inventory in transit = 49.865 or approximately 89.7 units (rounded to one decimal place)

Question 2

Which of the following represents a major method to establish a forecast for the need for MRO
Supplies?

Accepted Answer

Basing the forecast on the mean time between failures is a major method for establishing a forecast for the need for MRO supplies. This approach calculates the average amount of time that passes between equipment failures, and can help predict when maintenance or replacement will be required.

Question 3

A company carries an average annual inventory of $1,000,000. If the cost of capital is 10%, storage costs are 8%, and risk costs are 7%, what does it cost per year to carry this inventory?

Accepted Answer

The cost of carrying inventory can be calculated as:

Cost = Average inventory value x (Cost of capital + Storage costs + Risk costs)

= $1,000,000 x (10% + 8% + 7%)

= $1,000,000 x 25%

= $250,000

Therefore, the cost to carry this inventory is $250,000 per year. The correct answer is option D.

Question 4

Which of the following are reasons for keeping inventory?
I. To allow for goods in transit.
II. To build up stock for seasonal demand.
III. To reduce production costs.
IV. To guard against uncertainty in supply and demand.

Accepted Answer

All the options listed are valid reasons for keeping inventory. I allows for continuous operations during delivery times, II prepares for increased demand during specific seasons, III can optimize production runs and reduce costs, and IV provides a buffer against fluctuations in supply and demand.

Question 5

All of the following are reasons to keep inventory EXCEPT:

Accepted Answer

B) Couple supply with demand is not a reason to keep inventory. Inventory is kept to manage discrepancies between supply and demand, not to couple them directly. It helps in dealing with demand fluctuations, production scheduling flexibility, and variations in delivery times, rather than directly linking supply with demand.

Question 6

Which of the following would not be considered work-in-process inventory?
I. Finished goods in the stockroom.
II. Processed material waiting for inspection.
III. Raw materials not issued.
IV. Components in queue ahead of a milling machine.

Accepted Answer

Work-in-process inventory refers to materials that are in the process of being transformed into finished goods. I. Finished goods in the stockroom are no longer in process, thus not considered work-in-process. III. Raw materials not issued are still in their initial state and have not entered the production process, so they are not considered work-in-process either.

Question 7

Given the following information, calculate the inventory turns.
Sales = $200,000,000
Cost of sales = $160,000,000
Average inventory = $ 40,000,000
Carrying cost = 12%

Accepted Answer

Inventory Turnover Ratio = Cost of Sales / Average Inventory

Cost of sales = $160,000,000
Average Inventory = $40,000,000

Inventory Turnover Ratio =  $160,000,000 / $40,000,000 = 4

Therefore, the answer is C.

Quiz 9: Inventory Fundamentals

Delivery of goods from a supplier is in transit for 14 days. If the annual demand is 2600 units, what is the average annual inventory in transit?

Which of the following represents a major method to establish a forecast for the need for MRO Supplies?

A company carries an average annual inventory of $1,000,000. If the cost of capital is 10%, storage costs are 8%, and risk costs are 7%, what does it cost per year to carry this inventory?

Which of the following are reasons for keeping inventory? I. To allow for goods in transit. II. To build up stock for seasonal demand. III. To reduce production costs. IV. To guard against uncertainty in supply and demand.

All of the following are reasons to keep inventory EXCEPT:

Which of the following would not be considered work-in-process inventory? I. Finished goods in the stockroom. II. Processed material waiting for inspection. III. Raw materials not issued. IV. Components in queue ahead of a milling machine.

Given the following information, calculate the inventory turns. Sales = $200,000,000 Cost of sales = $160,000,000 Average inventory = $ 40,000,000 Carrying cost = 12%