Chapter 12: Inventory Management DO SECOND
1) The demand for automobiles would be considered as independent demand.
Answer: TRUE
36) A(n) ________ model gives satisfactory answers even with substantial variations in its parameters.
Answer: robust
33) ________ is the time between placement and receipt of an order.
Answer: Lead time
12) ________ inventory is material that is usually purchased, but has yet to enter the manufacturing process.
Answer: Raw material
1) If setup costs are reduced by substantial reductions in setup time, the production order quantity is also reduced.
Answer: TRUE
2) A major challenge in inventory management is to maintain a balance between inventory investment and customer service.
Answer: TRUE
2) In ABC analysis, "A" items are the most tightly controlled.
Answer: TRUE
4) One function of inventory is to take advantage of quantity discounts.
Answer: TRUE
6) In the production order quantity (POQ) model, inventory does not arrive in a single moment but flows in at a steady rate, resulting in a larger production/order quantity than in an otherwise identical EOQ problem.
Answer: TRUE
7) Retail inventory that is unaccounted for between receipt and time of sale is known as shrinkage.
Answer: TRUE
7) The reorder point is the inventory level at which action is taken to replenish the stocked item.
Answer: TRUE
11) Inventory that separates various parts of the production process performs a(n) ________ function.
Answer: decoupling
37) In the production order quantity model, the fraction of inventory that is used immediately and not stored is represented by the ratio of ________.
Answer: demand rate to production rate
35) In the EOQ model, for a given level of demand, annual holding cost is larger as the order quantity is ________.
Answer: larger
34) In an economic order quantity problem, the total annual cost curve is at its ________ where annual holding costs equal annual setup costs.
Answer: minimum
5) Work-in-process inventory is devoted to maintenance, repair, and operating materials.
Answer: FALSE
15) ________ is a method for dividing on-hand inventory into three classifications based on annual dollar volume.
Answer: ABC analysis
10) ABC analysis is based upon the principle that: A) all items in inventory must be monitored very closely. B) there are usually a few critical items, and many items that are less critical. C) an item is critical if its usage is high. D) more time should be spent on class "C" items because there are many more of them. E) as with grade distributions in many MBA courses, there should be more medium-level "B" items than either "A" or "C" items.
Answer: B
23) 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. A) $400 B) $800 C) $1200 D) Zero; this is a class C item. E) Cannot be determined because the unit price is not known.
Answer: B
24) 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: A) all 4000 units at one time. B) 200 units per order. C) every 20 days. D) 10 times per year. E) none of the above
Answer: B
26) An inventory decision rule states, "When the inventory level goes down to 14 gearboxes, 100 gearboxes will be ordered." Which of the following statements is TRUE? A) One hundred is the reorder point, and 14 is the order quantity. B) Fourteen is the reorder point, and 100 is the order quantity. C) The number 100 is a function of demand during lead time. D) Fourteen is the safety stock, and 100 is the reorder point. E) None of the above is true.
Answer: B
27) Which of the following statements regarding the production order quantity model is TRUE? A) It applies only to items produced in the firm's own production departments. B) It relaxes the assumption that all the order quantity is received at one time. C) It relaxes the assumption that the demand rate is constant. D) It minimizes the total production costs. E) It minimizes inventory.
Answer: B
30) A production order quantity problem has a daily demand rate = 10 and a daily production rate = 50. The production order quantity for this problem is approximately 612 units. What is the average inventory for this problem? A) 61 B) 245 C) 300 D) 306 E) 490
Answer: B
10) The two most basic inventory questions answered by the typical inventory model are: A) timing of orders and cost of orders. B) order quantity and cost of orders. C) timing of orders and order quantity. D) order quantity and service level. E) ordering cost and carrying cost.
Answer: C
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* = A) is smaller than the holding cost per unit. B) is zero. C) is one-half of the economic order quantity. D) is affected by the amount of product cost. E) goes down if the holding cost per unit goes down.
Answer: C
13) Which of the following statements regarding control of service inventories is TRUE? A) Service inventory is a fictional concept, because services are intangible. B) Service inventory needs no safety stock, because there's no such thing as a service stockout. C) Effective control of all goods leaving the facility is one applicable technique. D) Service inventory has carrying costs but no setup costs. E) Good personnel selection, training, and discipline are easy.
Answer: C
14) A certain type of computer costs $1,000, and the annual holding cost is 25% of the value of the item. Annual demand is 10,000 units, and the order cost is $150 per order. What is the approximate economic order quantity? A) 16 B) 70 C) 110 D) 183 E) 600
Answer: C
15) Most inventory models attempt to minimize: A) the likelihood of a stockout. B) the number of items ordered. C) total inventory-based costs. D) the number of orders placed. E) the safety stock.
Answer: C
17) In the basic EOQ model, if D = 6000 per year, S = $100, and holding cost = $5 per unit per month, what is the economic order quantity? A) 24 B) 100 C) 141 D) 490 E) 600
Answer: C
22) 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 $600. What is the inventory carrying cost per unit per year for this item? A) $1.50 B) $2.00 C) $3.00 D) $150.00 E) not enough data to determine
Answer: C
29) The assumptions of the production order quantity model are met in a situation where annual demand is 3650 units, setup cost is $50, holding cost is $12 per unit per year, the daily demand rate is 10 and the daily production rate is 100. What is the production order quantity for this problem? A) 139 B) 174 C) 184 D) 365 E) 548
Answer: C
11) Which of the following is NOT an assumption of the economic order quantity model shown below? Q* = A) Demand is known, constant, and independent. B) Lead time is known and constant. C) Quantity discounts are not possible. D) Production and use can occur simultaneously. E) The only variable costs are setup cost and holding (or carrying) cost.
Answer: D
12) What is the primary purpose of the basic economic order quantity model shown below? Q* = A) to calculate the reorder point, so that replenishments take place at the proper time B) to minimize the sum of carrying cost and holding cost C) to maximize the customer service level D) to minimize the sum of setup cost and holding cost E) to calculate the optimum safety stock
Answer: D
19) Which of the following statements about the basic EOQ model is FALSE? A) If the setup cost were to decrease, the EOQ would fall. B) If annual demand were to double, the number of orders per year would increase. C) If the ordering cost were to increase, the EOQ would rise. D) If annual demand were to double, the EOQ would also double. E) All of the above statements are true.
Answer: D
28) Which of these statements about the production order quantity model is FALSE? A) The production order quantity model is appropriate when the assumptions of the basic EOQ model are met, except that receipt is noninstantaneous. B) Because receipt is noninstantaneous, some units are used immediately and not stored in inventory. C) Average inventory is less than one-half of the production order quantity. D) All else equal, the smaller the ratio of demand rate to production rate, the larger is the production order quantity. E) None of the above is false.
Answer: D
8) Which of the following statements about ABC analysis is FALSE? A) ABC analysis is based on the presumption that controlling the few most important items produces the vast majority of inventory savings. B) In ABC analysis, "A" items should have tighter physical inventory control than "B" or "C" items have. C) In ABC analysis, forecasting methods for "C" items may be less sophisticated than for "A" items. D) ABC analysis is based on the presumption that all items must be tightly controlled to produce important cost savings. E) Criteria other than annual dollar volume, such as high holding cost or delivery problems, can determine item classification in ABC analysis.
Answer: D
8) Which of the following would NOT generally be a motive for a firm to hold inventories? A) to decouple various parts of the production process B) to provide a selection of goods for anticipated customer demand and to separate the firm from fluctuations in that demand C) to take advantage of quantity discounts D) to minimize holding costs E) to hedge against inflation
Answer: D
9) All EXCEPT which of the following statements about ABC analysis are true? A) In ABC analysis, inventory may be categorized by measures other than dollar volume. B) ABC analysis categorizes on-hand inventory into three groups based on annual dollar volume. C) ABC analysis is an application of the Pareto principle. D) ABC analysis suggests that all items require the same high degree of control. E) ABC analysis suggests that there are the critical few and the trivial many inventory items.
Answer: D
9) Which of the following is NOT one of the four main types of inventory? A) raw material inventory B) work-in-process inventory C) maintenance/repair/operating supply inventory D) safety stock inventory E) finished-goods inventory
Answer: D
11) ABC analysis divides on-hand inventory into three classes, generally based upon which of the following? A) item quality B) unit price C) the number of units on hand D) annual demand E) annual dollar volume
Answer: E
18) Which of the following statements about the basic EOQ model is TRUE? A) If the ordering cost were to double, the EOQ would rise. B) If annual demand were to double, the EOQ would increase. C) If the carrying cost were to increase, the EOQ would fall. D) If annual demand were to double, the number of orders per year would increase. E) All of the above statements are true.
Answer: E
25) Which of the following statements regarding the reorder point is TRUE? A) The reorder point is that quantity that triggers an action to restock an item. B) There is a reorder point even if lead time and demand during lead time are constant. C) The reorder point is larger than d × L if safety stock is present. D) A shorter lead time implies a smaller reorder point. E) All of the above are true.
Answer: E
3) Which of the following is an element of inventory holding costs? A) housing costs B) material handling costs C) investment costs D) pilferage, scrap, and obsolescence E) All of the above are elements of inventory holding costs.
Answer: E
4) Which category of inventory holding costs has a much higher percentage than average for rapid-change industries such as PCs and cell phones? A) housing costs B) material handling costs C) labor cost D) investment costs E) pilferage, scrap, and obsolescence
Answer: E
7) Which of the following is a function of inventory? A) to decouple various parts of the production process B) to provide a selection of goods for anticipated customer demand and to separate the firm from fluctuations in that demand C) to take advantage of quantity discounts D) to hedge against inflation E) All of the above are functions of inventory.
Answer: E
1) ABC analysis classifies inventoried items into three groups, usually based on annual units or quantities used.
Answer: FALSE
2) Insurance and taxes on inventory are part of the costs known as setup or ordering costs.
Answer: FALSE
2) The EOQ model is best suited for items whose demand is dependent on other products.
Answer: FALSE
3) ABC analysis is based on the presumption that carefully controlling all items is necessary to produce important inventory savings.
Answer: FALSE
3) In the simple EOQ model, if annual demand were to increase, the EOQ would increase proportionately.
Answer: FALSE
3) Which item to order and with which supplier the order should be placed are the two fundamental issues in inventory management.
Answer: FALSE
4) At the economic order quantity, holding costs are equal to product costs.
Answer: FALSE
5) In the simple EOQ model, if the carrying cost were to double, the EOQ would also double.
Answer: FALSE