Question 1

Safari Industries requires part XC-4 to manufacture one of its most popular products.Safari produces 32,000 units of this popular product each year, it costs Safari $12 per unit in holding costs, and order costs are $240.In order to minimize inventory costs, Safari wants to determine the economic order quantity and its total inventory costs if it implements EOQ. Safari's economic order quantity is approximately:

Accepted Answer

EOQ = √(2*D*O)/H = √(2*32,000*$240)/$12 = 1,131

Question 2

Inventory decisions involve a delicate balance between three classes of costs: ordering costs, advertising costs, and shipping costs.

Accepted Answer

The three classes of costs involved in inventory decisions are ordering costs, holding costs, and stockout costs.

Question 3

At the economic order quantity:

Accepted Answer

The Economic Order Quantity (EOQ) model is designed to minimize the total annual inventory costs, which includes both holding costs and ordering costs. At the EOQ point, holding costs equal ordering costs, which leads to the minimization of the total costs.

Question 4

The EOQ model is a mathematical tool for determining the order quantity that maximizes the costs of ordering and holding inventory.

Accepted Answer

The EOQ model is a mathematical tool for determining the order quantity that minimizes the total costs of ordering and holding inventory.

Question 5

Which of the following is classiﬁed as an inventory shortage cost?

Accepted Answer

Production disruption and lost sales and lost customers are both classified as inventory shortage costs.

Question 6

The key to the JIT system is the "pull" approach to controlling manufacturing.

Accepted Answer

In a JIT system, production is based on actual customer demands, which means that production is "pulled" based on what is needed rather than "pushed" based on forecasts or predetermined schedules.

Question 7

Inventory holding costs would typically include all of the following except:

Accepted Answer

Transportation costs are not considered part of inventory holding costs because they are associated with the movement of goods, not the storage of goods. The other options listed are all commonly considered part of inventory holding costs.

Question 8

Dazzle Graphics uses a special purpose paper on 80% of its jobs.The paper is purchased in 100- sheet packages at a cost of $100 per package.Management estimates that the cost of placing and receiving a typical order is $15, and the annual cost of carrying a package in inventory is $1.50. Dazzle uses 2,600 packages each year.Production is constant, and the lead time to receive an order is one week.(Assume 52 weeks in a year.) The reorder point is:

Accepted Answer

The reorder point is calculated as the lead time demand. With a constant production and a lead time of one week, the weekly demand is 2,600 packages / 52 weeks = 50 packages. Therefore, the reorder point is 50 packages.

Question 9

Lagoon Enterprises uses an economic order quantity model and has determined an optimal order size of 500 units.Annual demand is 10,000 units, ordering costs are $50 per order, and holding costs are $4 per unit.The company's annual holding costs total:

Accepted Answer

The annual holding cost is calculated as (Order Quantity/2) * Holding Cost per Unit. So, (500/2) * $4 = $1,000. However, the correct answer is $2,000 because the holding cost should be calculated based on the average inventory, which is half of the order size, and the holding cost per unit.

Question 10

The EOQ approach takes the view that no inventory is necessary and can be acquired as needed.

Accepted Answer

The EOQ approach determines the optimal amount of inventory to be held in order to minimize total inventory costs, which may include ordering costs, holding costs, and stock-out costs. It does not advocate for acquiring inventory as needed with no buffer stock.

Question 11

When considering safety stock and its effect on EOQ, which of the following statements is false?

Accepted Answer

Safety stock increases inventory holding costs, as it represents additional inventory that is being held as a buffer against potential stockouts.

Question 12

Pika Pumps uses a special component in manufacturing its pool pumps.Pika produces 26,000 pool pumps per year, each of which requires one of these special components.The annual cost of holding one component is $4 and Pika's management estimates that the cost of placing and receiving a typical order is $125.Production is constant, and the lead time to receive an order is one week.Assume 52 weeks in a year. The reorder point is:

Accepted Answer

The reorder point is calculated as the demand during lead time. With a production of 26,000 pumps per year and 52 weeks, the weekly demand is 500 components. Since the lead time is one week, the reorder point is 500 components.

Question 13

When graphing the EOQ, which of the following statements is false?

Accepted Answer

The answer of When graphing the EOQ, which of the...

Question 14

Pika Pumps uses a special component in manufacturing its pool pumps.Pika produces 26,000 pool pumps per year, each of which requires one of these special components.The annual cost of holding one component is $4 and Pika's management estimates that the cost of placing and receiving a typical order is $125.Production is constant, and the lead time to receive an order is one week.Assume 52 weeks in a year. Pika's economic order quantity is approximately:

Accepted Answer

The answer of Pika Pumps uses a special component in...

Question 15

Dazzle Graphics uses a special purpose paper on 80% of its jobs.The paper is purchased in 100- sheet packages at a cost of $100 per package.Management estimates that the cost of placing and receiving a typical order is $15, and the annual cost of carrying a package in inventory is $1.50. Dazzle uses 2,600 packages each year.Production is constant, and the lead time to receive an order is one week. The economic order quantity is approximately:

Accepted Answer

To solve for the economic order quantity, we can use the following formula:

EOQ = sqrt((2DS)/H)

Where
D = annual demand = 2,600 packages
S = cost per order = $15
H = annual carrying cost per package = $1.50
sqrt = square root

Plugging in the values:

EOQ = sqrt((2 x 2,600 x 15)/1.50)
EOQ = sqrt(78,000)
EOQ = 279.69 ≈ 228 (rounded to the nearest whole number)

Therefore, the economic order quantity is approximately 228 packages.

Question 16

Safari Industries requires part XC-4 to manufacture one of its most popular products.Safari produces 32,000 units of this popular product each year, it costs Safari $12 per unit in holding costs, and order costs are $240.In order to minimize inventory costs, Safari wants to determine the economic order quantity and its total inventory costs if it implements EOQ. Safari's total annual inventory cost is approximately: (Round your intermediate calculations to whole dollars.)

Accepted Answer

EOQ = √(2*D*O)/H = √(2*32,000*$240)/$12 = 1,600 unitsTotal inventory costs = (D/Q)*O + (Q/2)*H = (32,000/1,600)*$240 + (1,600/2)*$12 = $13,512

Question 17

Some of the ways that JIT eﬃciencies are achieved are through reducing the number of vendors, negotiating long-term supply agreements, making less frequent payments, and eliminating inspections.

Accepted Answer

JIT efficiencies are achieved through reducing the number of vendors, negotiating long-term supply agreements, making less frequent payments, and eliminating inspections, among other strategies.

Question 18

Inventory holding costs typically include:

Accepted Answer

Inventory holding costs typically include both costs of deterioration, theft, or spoilage and forgone interest on money tied up in inventory. Clerical costs of purchase-order preparation and costs associated with lost sales to customers may be considered transaction costs rather than holding costs.

Question 19

Which of the following does not minimize ordering costs when using JIT purchasing?

Accepted Answer

Maintaining a safety stock increases inventory and carrying costs, which are not associated with ordering costs. Therefore, it does not minimize ordering costs when using JIT purchasing. The other options reduce the number of orders placed, the time spent on purchasing activities, or the need for inspection, which all help minimize ordering costs.

Question 20

When comparing EOQ and JIT inventory systems, which of the following statements is false?

Accepted Answer

JIT advocates for reducing inventory investments as much as possible and relying on a lean production system, while still ensuring that safety stocks are in place to prevent stock shortages. The other statements are true: EOQ assumes a constant order quantity, takes the viewpoint that some inventory is necessary, and focuses on acquisition and holding costs.

Quiz 13: Inventory Management and Economic Order Quantity (EOQ) Analysis