Question 1

What is the disadvantage of using the tabular method to identify the economic order quantity?

Accepted Answer

The answer of What is the disadvantage of using the...

Question 2

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

Just-In-Time (JIT) efficiencies are indeed achieved through methods such as reducing the number of vendors to streamline supply chains, negotiating long-term supply agreements to ensure consistent supply and pricing, making less frequent payments to improve cash flow, and eliminating inspections by relying on trusted suppliers to deliver quality products, thereby reducing waste and improving efficiency.

Question 3

Broadbent Industries carries a part that is popular in the manufacture of automatic sprayers. Demand for this part is 4,000 units per year; order costs amount to $30 per order, and holding costs total $1.50 per unit. The company is considering the implementation of an economic order quantity model in an effort to better manage its inventories.
Required: 
A. Compute the economic order quantity.
B. Compute total annual inventory costs if Broadbent follows the EOQ policy.

Accepted Answer

A. The EOQ can be figured by taking the square root of: (2 x annual requirement x cost per order) / annual holding cost per unit. The square root of (2 x 4,000 x $30) /$1.50, or 160,000, is 400.
B. The ordering cost is based on 10 orders (4,000 units / 400 units) x $30, and totals $300; the holding cost is computed on the company's average inventory of 200 units (400 / 2) and amounts to $300 (200 x $1.50). Thus, costs at the EOQ total $600 ($300 + $300).

Question 4

Use the following information to answer the following Questions
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 1 week.

-The economic order quantity is approximately:

Accepted Answer

The Economic Order Quantity (EOQ) is calculated using the formula: EOQ = sqrt((2DS)/H), where D is the demand (2,600 packages), S is the ordering cost ($15), and H is the holding cost ($1.50). Plugging in these values gives EOQ = sqrt((2*2600*15)/1.5) ≈ 228 packages.

Question 5

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

Accepted Answer

In a Just-In-Time (JIT) system, production is driven by demand, meaning that items are produced only as they are needed for the next stage of production or for customer delivery. This "pull" approach contrasts with traditional "push" systems, where products are made in anticipation of future demand.

Question 6

Use the following information to answer the following Questions
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 1 week.

-The reorder point is:

Accepted Answer

The reorder point is calculated based on the demand during the lead time. Since Dazzle uses 2,600 packages each year and there are 52 weeks in a year, the weekly usage is 2,600 / 52 = 50 packages. Given that the lead time to receive an order is 1 week, the reorder point is the weekly usage, which is 50 packages.

Question 7

Broadbent Industries carries a part that is popular in the manufacture of automatic sprayers. Demand for this part is 4,000 units per year; order costs amount to $30 per order, and holding costs total $1.50 per unit.
The company, which currently places four orders per year with its suppliers, is considering the implementation of an economic order quantity (EOQ) model to better manage its inventories. Preliminary EOQ calculations revealed an optimal order quantity of 400 units and total annual inventory costs of $600.
Required: 
A. In comparison with its current policy, how much will Broadbent save by adopting the EOQ model?
B. Briefly explain the philosophical difference between the EOQ model and the just-in-time model. Which of the two models will likely result in lower holding costs for the firm? Why?

Accepted Answer

The answer of Broadbent Industries carries a part that is...

Question 8

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

Accepted Answer

The Economic Order Quantity (EOQ) approach aims to determine the optimal order size that minimizes the total inventory costs, including ordering and holding costs, not to eliminate inventory entirely.

Question 9

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

Accepted Answer

Maintaining a safety stock does not minimize ordering costs in JIT purchasing because JIT aims to reduce inventory levels and associated costs, including those of holding safety stock. Safety stock is contrary to JIT principles, which focus on minimizing inventory and ordering precisely what is needed when it is needed.

Question 10

Economic Order Quantity, timing of orders and safety stock are three important considerations in inventory management.
Required: 
A. Explain each of these considerations.
B. How is EOQ affected by the timing of orders and safety stock?

Accepted Answer

The answer of Economic Order Quantity, timing of orders and...

Question 11

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

Accepted Answer

Inventory shortage costs include all the consequences of not having enough inventory on hand, including both production disruptions and the loss of sales and customers. These shortages can lead to delays in production and dissatisfied customers who may turn to competitors, thus directly impacting a company's revenue and reputation.

Question 12

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 13

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 14

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 ordering and holding costs total:

Accepted Answer

The total annual ordering cost is (10,000 units / 500 units per order) * $50 = $1,000. The total annual holding cost is (500 units / 2) * $4 = $1,000. Therefore, the total annual ordering and holding costs are $1,000 + $1,000 = $2,000.

Question 15

Inventory holding costs typically include:

Accepted Answer

Inventory holding costs include various expenses associated with holding inventory, such as costs of deterioration, theft, or spoilage (B), and forgone interest on the money tied up in inventory (D). These costs represent the financial and material losses a business incurs over time by storing inventory, as well as the opportunity cost of the capital invested in the inventory.

Question 16

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

Accepted Answer

Inventory decisions typically involve a balance between ordering costs, holding costs, and stockout costs, not advertising costs and shipping costs.

Question 17

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

Accepted Answer

Transportation costs are generally considered separate from inventory holding costs. Holding costs typically include expenses related to storing and maintaining inventory, such as insurance, risk of theft, obsolescence, and warehouse rent, but not the costs to transport goods to the storage location.

Question 18

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

Accepted Answer

JIT (Just-In-Time) inventory systems aim to minimize inventory levels, including safety stocks, by receiving goods only as they are needed in the production process, thereby reducing inventory costs and waste. This contrasts with the statement that JIT argues safety stocks are necessary, which is false.

Question 19

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

Accepted Answer

Holding costs are typically an upward sloping line to the right, not downward, as they increase with larger inventory levels.

Question 20

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

Accepted Answer

Safety stock increases inventory holding costs because it involves keeping additional inventory on hand to mitigate the risk of stockouts, which requires more storage space and incurs higher costs associated with maintaining the extra inventory.

Quiz 20: Inventory Management