Question 1

Considering the EOQ model, a reduction in ordering costs justifies reducing the lot size ordered.

Accepted Answer

According to the EOQ model, a reduction in ordering costs results in a decrease in the total cost of inventory. As a result, it may justify reducing the lot size ordered to optimize the economic order quantity.

Question 2

Which one of the following statements concerning the economic order quantity (EOQ) model is True?

Accepted Answer

According to the EOQ model, an increase in holding cost will decrease the EOQ and a decrease in holding cost will increase the EOQ. On the other hand, an increase in demand will increase the EOQ and a decrease in demand will decrease the EOQ. Therefore, only option C is true.

Question 3

You have taken a job in industry and are facing your first ordering decision. As you prepare to place the order, you remember your instructor teaching you that you would not use the EOQ formula if:

Accepted Answer

The EOQ formula assumes that the ordering quantity is not constrained by any outside factors such as capacity limitations. Therefore, if the order size is constrained by capacity limitations, the EOQ formula cannot be used. The other options listed do not exclude the use of the EOQ formula.

Question 4

The Lemma Company manufactures and sells 10 products. Ways have been found to cut both the setup and inventory holding costs in half. What effect will this have on the economic order quantities of the 10 products?

Accepted Answer

The answer of The Lemma Company manufactures and sells 10...

Question 5

Vilas County Hospital consumed 400 boxes of bandages per week last year. The price of bandages was $80 per box, and the hospital operates 52 weeks per year. The cost of processing an order was $64, and the cost of holding one box throughout a full year was 20% of the value of the material. Last year the hospital ordered bandages, on average, once every two weeks, each time ordering 800 boxes. What extra cost did the hospital incur that could have been avoided if the EOQ concept had been applied?

Accepted Answer

The answer of Vilas County Hospital consumed 400 boxes of...

Question 6

Scenario 9.3
The Talbot Company uses electrical assemblies to produce an array of small appliances. One of its high cost / high volume assemblies, the XO-01, has an estimated annual demand of 8,000 units. Talbot estimates the cost to place an order is $50, and the holding cost for each assembly is $20 per year. The company operates 250 days per year.
-Use the information in Scenario 9.3. What is the economic order quantity for the XO-01?

Accepted Answer

The Economic Order Quantity (EOQ) is calculated using the formula: EOQ = sqrt((2 * Demand * Order Cost) / Holding Cost). Plugging in the values: EOQ = sqrt((2 * 8000 * 50) / 20) = sqrt(40000) = 200 units.

Question 7

Which one of the following is not an assumption of the EOQ model?

Accepted Answer

While the EOQ model does take into consideration the cost implications of ordering larger quantities, it does not assume that quantity discounts are available or can be taken advantage of for large lot sizes.

Question 8

The EOQ is the smallest lot size that a supplier will allow a customer to order.

Accepted Answer

The EOQ (Economic Order Quantity) is the optimal lot size that minimizes total inventory costs, including ordering costs and holding costs. It is not a mandatory lot size that a supplier imposes on a customer.

Question 9

Sensitivity analysis on the economic order quantity (EOQ) formula can help the operations manager answer several questions on how to manage inventories. Which one of the following questions is not answered by EOQ sensitivity analysis?

Accepted Answer

Sensitivity analysis of the EOQ formula primarily evaluates the impact of changes in demand (D), holding cost (H), and setup cost (S) on the optimal order quantity. It does not directly address supply and lead-time uncertainty, which are factors more closely related to safety stock and reorder point decisions rather than to the calculation of EOQ itself.

Question 10

Inventory manager George Costanza knows too well that shrinkage occurs so he goes to the stock room every day to do a spot check of a few pre-selected items, physically counting them to verify that his count agrees with the number indicated by their computerized inventory system. This method of inventory control is known as ________.

Accepted Answer

The answer of Inventory manager George Costanza knows too well...

Question 11

In an ABC analysis, class ________ SKUs, which typically make up about ________% of the SKUs, account for only about 15% of the dollar usage.

Accepted Answer

The answer of In an ABC analysis, class ________ SKUs,...

Question 12

Which one of the following statements regarding the economic order quantity (EOQ) is True?

Accepted Answer

The EOQ model aims to minimize the total cost of inventory by finding the ideal order quantity. If an order quantity is larger than the EOQ, it means holding more inventory than necessary, leading to higher annual holding costs compared to the costs of placing orders (ordering costs). The EOQ formula balances these two costs to find the most cost-effective order size.

Question 13

What is ABC analysis and how does it work?

Accepted Answer

The answer of What is ABC analysis and how does...

Question 14

As the annual demand increases, other factors remaining constant, the EOQ also increases.

Accepted Answer

EOQ (Economic Order Quantity) is a formula used to calculate the optimal quantity of inventory to order, based on factors such as demand, ordering costs and holding costs. As the annual demand increases, the quantity required to meet that demand also increases, which subsequently increases the EOQ.

Question 15

EOQ should be used if you follow a make-to-stock strategy and the item has relatively stable demand.

Accepted Answer

EOQ (economic order quantity) is most appropriate for businesses that operate on a make-to-stock basis and have a steady demand for their goods. EOQ is not the best option for businesses that follow a make-to-order strategy or have highly variable demand for their products.

Question 16

A company operating under an EOQ policy enjoys rising annual demand for their products for three consecutive years. During this time their holding cost and ordering cost remain constant. Which statement is best?

Accepted Answer

As the annual demand is rising for three consecutive years, it is likely that the company's order quantity will also increase to meet the demand. However, as the holding cost and ordering cost remain constant, the EOQ formula (which balances these costs) will lead to a shorter time between orders in order to keep up with the rising demand. Therefore, the order quantity will rise but the time between orders will fall.

Question 17

EOQ should be used if you use a make-to-order strategy and the customer specifies that the entire order be delivered in one shipment.

Accepted Answer

EOQ (Economic Order Quantity) is typically used in a make-to-stock strategy where there is recurring demand for a product. In a make-to-order strategy, the production is initiated only when there is a specific order. Therefore, the concept of ordering a specific quantity at a certain time (EOQ) may not be applicable. Also, if the customer specifies that the entire order be delivered in one shipment, it may not be feasible to use EOQ as the entire order has to be produced and shipped together.

Question 18

Which one of the following statements concerning the economic order quantity (EOQ) is True?

Accepted Answer

The Economic Order Quantity (EOQ) model is designed to minimize the total inventory costs, which include both ordering costs (such as setup costs) and holding costs. An increase in demand leads to an increase in the EOQ because it aims to balance the costs of ordering and holding inventory. Higher demand means more frequent orders are needed to maintain stock levels, thus increasing the EOQ to optimize the balance between these costs.

Question 19

In an ABC analysis, class ________ SKUs, which typically make up ________% of the SKUs, account for only about 5% of the dollar usage.

Accepted Answer