Question 1

Most inventory models attempt to minimize:

Accepted Answer

Most inventory models aim to minimize total inventory-based costs, which usually include holding costs, ordering costs, and stockout costs. While minimizing the likelihood of a stockout, the number of items ordered, or the number of orders placed may be important factors in achieving this goal, the overriding objective is typically to keep costs as low as possible. Safety stock is not typically minimized, as it is intended to provide a buffer against unexpected demand or supply chain disruptions.

Question 2

A product whose EOQ is 400 units experiences a 50% increase in demand. The new EOQ is:

Accepted Answer

The Economic Order Quantity (EOQ) formula is $\sqrt{\frac{2DS}{H}}$, where D is demand, S is the ordering cost, and H is the holding cost per unit per period. A 50% increase in demand (D) does not result in a 50% increase in EOQ because the relationship is not linear due to the square root; therefore, the EOQ increases by less than 50%.

Question 3

Which of the following statements about the basic EOQ model is FALSE?

Accepted Answer

The EOQ (Economic Order Quantity) model is designed to minimize the total holding costs and ordering costs. The formula for EOQ is $\sqrt{\frac{2DS}{H}}$, where $D$ is the demand rate, $S$ is the setup or ordering cost, and $H$ is the holding or carrying cost per unit per time period. If annual demand were to double, the EOQ would indeed increase, as seen in option D, because the EOQ is directly proportional to the square root of demand ($D$). However, the number of orders per year would not increase by a specific percentage like 73% as stated in option B; instead, it would increase but at a rate determined by the new EOQ calculation. The increase in orders per year would actually be less than double, because as the EOQ increases, fewer orders are needed to meet the demand.

Question 4

In the quantity discount model, the cost of acquiring goods (product cost) is a factor in determining lot size.

Accepted Answer

In the quantity discount model, the product cost is a key factor in determining the optimal order quantity (lot size). As the product cost decreases with larger quantities ordered, it may be more cost-effective to order a larger quantity and take advantage of the lower price per unit.

Question 5

In the production order quantity model, the cost of acquiring goods (product cost) is a factor in determining lot size.

Accepted Answer

The production order quantity model primarily focuses on minimizing the total costs associated with ordering and holding inventory, including setup costs and holding costs, rather than the product cost itself.

Question 6

Which of the following statements about the basic EOQ model is TRUE?

Accepted Answer

The answer of Which of the following statements about the...

Question 7

For a certain item, the cost-minimizing order quantity obtained with the basic EOQ model is 200 units, and the total annual inventory (carrying and setup) cost is $400. What is the inventory carrying cost per unit per year for this item?

Accepted Answer

The total annual inventory cost is the sum of carrying and setup costs. With EOQ, carrying cost = setup cost. Therefore, carrying cost = $400/2 = $200. Since EOQ is 200 units, carrying cost per unit = $200/200 = $1.00. However, the correct calculation should be $200/200 = $2.00 per unit per year.

Question 8

A product has a demand of 4000 units per year. Ordering cost is $20, and holding cost is $4 per unit per year. The EOQ model is appropriate. The cost-minimizing solution for this product will cost ________ per year in total annual inventory (holding and setup) costs.

Accepted Answer

The Economic Order Quantity (EOQ) model is used to find the optimal order quantity that minimizes total inventory costs, which include holding costs and ordering costs. The total cost is calculated using the formula: Total Cost = sqrt((2DS)/H), where D is the demand, S is the ordering cost, and H is the holding cost per unit. Plugging in the values given: Total Cost = sqrt((2*4000*20)/4) = sqrt(160000) = $400. However, this calculation gives us the optimal order quantity, not the total annual cost. The total annual cost involves both holding and ordering costs, which can be calculated using the formula: Total Annual Cost = sqrt(2DSH). So, Total Annual Cost = sqrt(2*4000*20*4) = sqrt(640000) = $800. This means the cost-minimizing solution for this product will cost $800 per year in total annual inventory costs.

Question 9

In the basic EOQ model, if the cost of placing an order doubles, and all other values remain constant, the EOQ will:

Accepted Answer

The Economic Order Quantity (EOQ) formula is $\sqrt{\frac{2DS}{H}}$, where $D$ is the demand rate, $S$ is the setup or ordering cost, and $H$ is the holding cost per unit per time period. If the cost of placing an order ($S$) doubles, the EOQ will increase by a factor of $\sqrt{2}$, which is approximately 1.41 or an increase of about 41%.

Question 10

In the quantity discount model, it is possible to have a cost-minimizing solution where annual ordering costs do not equal annual carrying costs.

Accepted Answer

In the quantity discount model, the cost-minimizing solution considers the trade-off between ordering costs and carrying costs, but it does not necessarily require them to be equal to each other. Depending on the discount structure and other factors, it is possible to find a solution where one of the costs dominates the other in terms of total cost.

Question 11

A product whose EOQ is 40 units experiences an increase in ordering cost from $10 per order to $90 per order. The revised EOQ is:

Accepted Answer

The Economic Order Quantity (EOQ) formula is EOQ = sqrt((2DS)/H). An increase in ordering cost (S) from $10 to $90 increases the EOQ by a factor of sqrt(9), which is 3. Thus, the EOQ becomes three times as large.

Question 12

Which of the following is NOT an assumption of the economic order quantity model shown below? Q* =

Accepted Answer

The answer of Which of the following is NOT an...

Question 13

If the actual order quantity is the economic order quantity in a problem that meets the assumptions of the economic order quantity model shown below, the average amount of inventory on hand: Q* =

Accepted Answer

The answer of If the actual order quantity is the...

Question 14

What is the primary purpose of the basic economic order quantity model shown below? Q* =

Accepted Answer

The answer of What is the primary purpose of the...

Question 15

A product has a demand of 4000 units per year. Ordering cost is $20, and holding cost is $4 per unit per year. The cost-minimizing solution for this product is to order:

Accepted Answer

The Economic Order Quantity (EOQ) formula is used to find the cost-minimizing solution for ordering inventory. The formula is $\sqrt{\frac{2DS}{H}}$, where $D$ is the demand (4000 units/year), $S$ is the ordering cost ($20), and $H$ is the holding cost per unit per year ($4). Plugging in the values, we get $\sqrt{\frac{2*4000*20}{4}} = \sqrt{40000} = 200$. Therefore, ordering 200 units per order minimizes the total cost.

Question 16

A certain type of computer costs $10 per unit, and the annual holding cost is 25% of the value of the item. Annual demand is 1,000 units, and the order cost is $150 per order. What is the approximate economic order quantity?

Accepted Answer

The Economic Order Quantity (EOQ) formula is √((2DS)/H), where D is demand (1,000 units), S is order cost ($150), and H is holding cost per unit ($10 * 25% = $2.5). Plugging in these values gives √((2*1000*150)/2.5) = √(120,000/2.5) = √48,000 = 219.2, which is approximately 346.

Question 17

The reorder point is the inventory level at which action is taken to replenish the stocked item.

Accepted Answer

The statement describes the correct definition of a reorder point, which is the inventory level that triggers the need to place an order for more stock. Therefore, the answer is True.

Question 18

The two most basic inventory questions answered by the typical inventory model are:

Accepted Answer

The two most basic inventory questions answered by the typical inventory model are timing of orders and order quantity. Timing of orders refers to when orders should be placed, while order quantity refers to how much should be ordered each time. Therefore, choice C, timing of orders and order quantity, is the best answer.

Question 19

Variations in setup costs, holding costs, and demand usually make relatively modest differences in total cost because the EOQ model is robust.

Accepted Answer

The EOQ model is designed to find the optimal order quantity that minimizes the total cost by balancing the setup cost and holding cost. Although variations in setup costs, holding costs, and demand can affect the outcome, the EOQ model is considered robust and can still provide a good estimate of the optimal order quantity. Therefore, the statement is true.

Question 20

In the basic EOQ model, if D = 6000 per year, S = $100, and holding cost = $10 per unit per month, what is the economic order quantity?

Accepted Answer

The answer of In the basic EOQ model, if D...

Quiz 11: Inventory Management