Question 1

Using the POQ method of ordering, calculate the total cost of carrying and ordering inventory for the 6 week period shown. Use a POQ = 3 weeks for your answer.
$$\begin{array} { l c c c c c c } 
\text { Week } & 1 & 2 & 3 & 4 & 5 & 6 \
\text { Net requirements } & 60 & 40 & 10 & 50 & 20 & 30 \
\text { Planned order receipts } & & & & & & \
\text { Ending inventory } & & & & & &
\end{array}$$
Cost to place an order = $100.00
Cost to carry inventory = $1.00 per unit per week
Annual demand = 1,500 units
Cost per unit = $200.00
Opening inventory = 0 units

Accepted Answer

The POQ method orders every 3 weeks. Orders are placed in weeks 1 and 4. The total ordering cost is $200 ($100 per order x 2 orders). The carrying cost is calculated based on the ending inventory each week. The total carrying cost is $140. Therefore, the total cost is $340 ($200 ordering cost + $140 carrying cost).

Question 2

Which of the following are NOT assumptions on which the economic order quantity (EOQ) is based?

Accepted Answer

The EOQ model assumes that demand is constant and known, order costs and carrying costs are constant, and replenishment is instantaneous, meaning replacement occurs all at once. It does not assume that the item is produced continuously, as it primarily deals with the ordering or restocking process, not the production process.

Question 3

If the economic order quantity is to be calculated in DOLLARS, then:

Accepted Answer

To calculate economic order quantity in dollars, the annual demand must be stated in dollars as it is used to calculate total annual cost. Ordering costs do not necessarily have to be stated on a per unit basis and carrying costs can be stated in various ways (such as percentage of unit cost), but the annual demand must be stated in dollars. Therefore, choice A is the only true statement.

Question 4

In developing the standard economic order quantity formula the following assumption(s) is (are)
Made:

Accepted Answer

All of the above assumptions are made in developing the standard economic order quantity formula.

Question 5

Quantity discounts cause companies to:

Accepted Answer

Quantity discounts encourage companies to purchase larger quantities to take advantage of lower prices, which typically results in increased inventory levels.

Question 6

Which of the following statements is correct?

Accepted Answer

If stock is not received all at once into inventory then EOQ formula can be modified and used

Question 7

Which of the following statements is best?
I. The EOQ should be used with lumpy demand.
II. Transportation cost should be included in the cost of ordering.
III. Anticipation inventory should be built based on capacity and future demand.

Accepted Answer

II and III are correct because transportation cost is indeed part of the total cost of ordering, and anticipation inventory is built in anticipation of future demand and capacity constraints. The EOQ model is not suitable for lumpy demand due to its assumption of constant demand.

Question 8

Which of the following is NOT true regarding period order quantity method (POQ) of lot sizing?

Accepted Answer

The Period Order Quantity (POQ) method involves varying the order quantity to ensure a constant time interval of inventory coverage, unlike the Economic Order Quantity (EOQ) method where the order quantity is constant.

Question 9

Assuming the cost per order is constant, increasing the order quantity will cause annual ordering costs to:

Accepted Answer

Annual ordering costs decrease as order quantity increases because fewer orders are needed to meet demand, reducing the total number of orders placed per year.

Question 10

In determining the economic order quantity (EOQ) the following costs are considered:

Accepted Answer

The economic order quantity (EOQ) formula takes into account the tradeoff between ordering costs and inventory carrying costs. Ordering costs include the costs of preparing and transmitting orders, while inventory carrying costs include storage, insurance, and handling costs. The EOQ model assumes that demand is constant and that orders arrive all at once when inventory is depleted. Therefore, costs of a stockout and costs of changing production levels are not considered in the EOQ formula.

Question 11

For a certain group of items the cost of carrying inventory and the cost of placing orders is not exactly known but is about the same for all the items. The company has calculated K = 20 for these items. If one item has an annual demand (A) = $10,000 the NEW order quantity should be:

Accepted Answer

The EOQ formula is: EOQ = sqrt((2*A*K)/H)where:A = annual demandK = cost of placing an orderH = cost of carrying inventoryIn this case, we are given that K = 20 and A = 10,000. We do not know the value of H, but we are told that it is about the same for all items in this group. Therefore, we can assume that H is a constant.Plugging in the values we know, we get:EOQ = sqrt((2*10,000*20)/H)EOQ = sqrt(400,000/H)Since H is a constant, we can see that the EOQ is inversely proportional to the square root of H. Therefore, the EOQ will be larger for smaller values of H.In this case, we are not given a specific value for H, but we are told that it is about the same for all items in this group. Therefore, we can assume that H is relatively small. This means that the EOQ will be relatively large.Of the choices given, the only one that is larger than 10,000 is A) $2,000. Therefore, the correct answer is A.

Question 12

If a purchase discount is taken:
1) There is a saving in purchase cost.
2) Ordering costs are reduced.
3) Carrying costs are increased.
4) There is not necessarily a net saving.

Accepted Answer

1) Taking a purchase discount directly reduces the cost of purchases. 2) Ordering costs are not directly affected by purchase discounts, so this statement is incorrect in the context of the question. 3) Carrying costs are related to holding inventory and are not directly affected by purchase discounts. 4) While there is a saving in purchase cost, other costs or situations may offset this saving, making it not necessarily a net saving overall. However, the explanation provided in the choices seems to have a misunderstanding, leading to an incorrect conclusion. The correct understanding is that taking a purchase discount saves on purchase cost, but it doesn't directly affect ordering or carrying costs, and there might not be a net saving due to other factors. Therefore, the correct answer based on the most accurate interpretation of the effects of purchase discounts is that there is a saving in purchase cost, and there is not necessarily a net saving, making the correct statements 1 and 4. However, given the options provided and the explanations, there seems to be a mistake in my initial assessment. The correct interpretation should focus on the direct impact of purchase discounts, which is a saving in purchase cost, making 1 the primary correct statement. The confusion arises from the misinterpretation of the effects on ordering and carrying costs, which are not directly impacted by purchase discounts.

Question 13

For a particular item the usage is 2000 units per year, the ordering cost is $10, the inventory carrying cost is 20% and the unit cost is $5. The economic order quantity is:

Accepted Answer

The Economic Order Quantity (EOQ) is calculated using the formula: EOQ = sqrt((2 * Demand * Ordering Cost) / Carrying Cost). Substituting the given values: EOQ = sqrt((2 * 2000 * 10) / (0.20 * 5)) = sqrt(4000) = 200 units.

Question 14

A supplier offers a quantity discount. Which of the following will influence the decision to accept the discount or not?

Accepted Answer

All of the given factors are relevant in influencing the decision to accept or reject a quantity discount. The purchase cost is directly related to the pricing of the product and is a key factor in determining the cost savings from the discount. The cost of carrying inventory must also be considered, as purchasing a large quantity of items may lead to an increase in storage costs, such as rent or utilities, as well as potential inventory spoilage or obsolescence. Lastly, the cost of placing an order may also be affected, as ordering in larger quantities may reduce the frequency of orders, consequently reducing the cost of each transaction.

Question 15

The period order quantity is equal to:

Accepted Answer

The period order quantity is the order quantity that is placed at regular intervals over a given period of time. It is calculated by dividing the EOQ by the average period demand. This ensures that inventory costs are minimized while still meeting demand over the period of time. Therefore, B is the correct answer.

Question 16

A firm uses $20,000 of an item per year. The carrying cost is 25%, the cost of ordering is $10 and the order quantity is $1,000. The annual total cost of carrying plus ordering would be:

Accepted Answer

The annual carrying cost can be calculated as 25% of the cost of one unit multiplied by the average inventory level. The average inventory level is half of the order quantity, since orders are placed when inventory reaches 0.5 units. Thus, the carrying cost is:

0.25 x cost of one unit x 0.5 order quantity = 0.125 x $1,000 = $125

The annual ordering cost is the cost per order multiplied by the number of orders placed. Since the firm orders $20,000 / $1,000 = 20 times per year, the ordering cost is:

$10 x 20 orders = $200

The total annual cost of carrying plus ordering is the sum of the annual carrying cost and the annual ordering cost:

$125 + $200 = $325

Therefore, the best choice is D, $816 is far too high, A and C are too low, and B is not a valid option.

Question 17

In the simple EOQ model annual inventory carrying costs and annual ordering costs vary:

Accepted Answer

Annual inventory carrying costs and annual ordering costs vary with the order quantity in the simple EOQ model. This is because as the order quantity increases, the average inventory level and therefore the carrying costs increase, while the number of orders and therefore the ordering costs decrease.

Question 18

While working a simple EOQ problem, you notice that, with a certain lot size, the annual ordering cost is exactly the same value as the annual inventory carrying cost. Which of the following is true?

Accepted Answer

When the annual ordering cost is equal to the annual inventory carrying cost, it means that the total cost is at its minimum and the lot size is the economic order quantity. Therefore, option A is the correct choice. Option B is incorrect because the total cost is at its minimum, not maximum. Option C is incorrect because the annual carrying cost is not affected by the order quantity when the total cost is at its minimum.

Question 19

The EOQ for an item is 5500 units and the annual demand is 78,000 units. What is the period order quantity?

Accepted Answer

Period order quantity = EOQ / (demand per period)
To find demand per period, we need to divide the annual demand by the number of periods in a year. Assuming a constant demand rate throughout the year, we can use the basic formula:
Demand per period = Annual demand / Number of periods
In this case, let us assume that the ordering frequency is monthly. Therefore, the number of periods in a year is 12.
Demand per period = 78,000 / 12 = 6,500
Substituting this value into our formula,
Period order quantity = 5,500 / 6,500 = 0.846 = 3.67 (rounded to two decimal places)
Therefore, the best choice is option C.

Question 20

If the order quantity is increased the annual cost of carrying inventory will:

Accepted Answer

When the order quantity is increased, the inventory level also increases, which in turn increases the cost of carrying inventory. Therefore, the annual cost of carrying inventory will increase.

Quiz 10: Order Quantities