Test Bank Chapter 9 (no fill in blank)
A neighborhood sportswear store sells a pair of Victoria sneakers for $40. Due to the recent fitness craze, these shoes are in high demand: 50 pairs of shoes are sold per week. The ordering cost is $20 per order, and the annual holding cost is 20% of selling price. If the store operates 52 weeks a year, what can you say about the current lot size of 235? A) too large B) too small C) just right D) cannot tell from the information given
A
Consider the following conditions for an item used in the Hess Company's manufacturing process: On-hand inventory: 80 units Open orders (scheduled receipts): 100 units Backorders: 20 units Reorder point: 150 units Quantity per order: 50 units Which of the following statements best describes Hess's situation regarding inventory replenishment? A) No action is required, since Hess's inventory position is greater than the reorder point. B) Hess should order one lot of 50 units to cover its backorders. C) Because it is incurring backorders, Hess should increase its reorder point. D) Hess should place an order for 50 units, since their inventory position is less than the reorder point.
A
Which of the following DOES NOT generate pressure to increase inventories? A) transportation costs B) backorders and stockouts C) inventory shrinkage costs D) quantity discounts
A
Which of the following generates pressure to decrease inventories? A) inventory shrinkage costs B) backorders and stockouts C) transportation costs D) quantity discounts
A
Which of the following is NOT a lever for reducing cycle inventories? A) place purchased item orders at fixed intervals B) reduce lot sizes for items moving in the supply chain C) streamline methods for placing orders and making machine set ups D) increase repeatability to eliminate the need for changeovers
A
Which one of the following statements about inventory control systems is best? A) A single-bin system is essentially a P system, with the target inventory and current inventory position established visually. B) A base-stock system minimizes ordering and setup costs by placing orders more infrequently. C) The base-stock system is mostly used for inexpensive items because it maximizes cycle inventory costs. D) Visual systems are intended for use with high-value items, such as jet engines, that don't experience a steady demand.
A
Which one of the following statements is best? A) A P system requires more safety stock than a Q system. B) A P system lends itself more to quantity discounts than does a Q system. C) A P system requires more administrative control and computer support than does a Q system. D) In a periodic review system, the value of Q is kept the same from one cycle to another.
A
A continuous review system is sometimes called a fixed interval reorder system.
False
A stock-keeping unit (SKU) is a specially designed container for holding a specific amount of an inventory item somewhere along the supply chain
False
Considering the EOQ model, smaller lots are justified when holding costs are decreased.
False
Dependent demand items are those items for which demand is influenced by market conditions and is not related to inventory decisions for any other item held in stock.
False
EOQ should be used if you use a make-to-order strategy and the customer specifies the entire order be delivered in one shipment.
False
If on-hand inventory = 100 units, scheduled receipts = 100 units and backorders = 100 units, the Inventory Position (IP) is the sum of the three, or 300 units.
False
One component of the ordering cost of inventory is shrinkage.
False
Reducing setup costs will increase the pressure to keep larger inventories.
False
Repeatability is an undesirable feature of some orders because they must be repeated until the order is filled correctly.
False
The EOQ is the smallest lot size that a supplier will allow a customer to order.
False
The primary lever to reduce anticipation inventory is to place orders closer to the time when they must be received.
False
When looking at inventory management, the term "lot size" refers to the physical dimensions of the area where the inventory is stored.
False
When using ABC analysis, class C SKUs should be reviewed frequently.
False
A backorder occurs when a customer order cannot be filled when it is placed, but is instead filled later.
True
A continuous review system is sometimes called a reorder point system.
True
A periodic review system is a system in which an item's inventory position is reviewed periodically rather than continuously.
True
A quantity discount is attractive because there is a drop in the price per unit when the order is sufficiently large.
True
A stock-keeping unit (SKU) is an individual item or product that has an identifying code and is held in inventory somewhere along the supply chain.
True
A stockout occurs when an item that is typically stocked is not available to satisfy a demand the moment it occurs.
True
ABC analysis is a process for categorizing SKUs according to dollar usage so that managers can focus on items with the highest dollar value.
True
As the annual demand increases, the EOQ also increases.
True
As the service level increases, the probability of not running out of stock during a cycle decreases.
True
Considering the EOQ model, a reduction in ordering costs justifies reducing the lot sizes ordered.
True
Cycle counting is an inventory-control method whereby storeroom personnel physically count a small percent of the total number of items each day.
True
EOQ should be used if you follow a make-to-stock strategy and the item has relatively stable demand.
True
If on-hand inventory = 100 units, scheduled receipts = 100 units and backorders = 100 units, the Inventory Position (IP) is 100 units.
True
Increasing inventory levels can sometimes help a firm reduce both its inbound and outbound transportation costs.
True
Independent-demand items are those items for which demand is influenced by market conditions and is not related to inventory decisions for any other items held in stock.
True
Inventory management is the planning and controlling of inventories in order to meet the competitive priorities of the organization.
True
One component of the holding cost of inventory is interest.
True
Setup cost is independent of order size
True
The primary reason for keeping inventories low is that inventory represents a temporary monetary investment in goods on which a firm must pay interest.
True
The scheduled receipts are orders that have been placed but not yet received
True
The two-bin inventory system is a type of visual system
True
When looking at inventory management, the term "lot size" refers to the quantity of an inventory item management either buys from a supplier or manufactures using internal processes.
True
An item experiences an annual demand of 7,200 units. It costs $8 to hold an item in inventory for one year and $16 to place an order. If the EOQ model is used, what is the time between orders? Assume that there are 52 business weeks in a year. A) less than 1 week B) greater than 1 week but less than or equal to 2 weeks C) greater than 2 weeks but less than or equal to 3 weeks D) greater than 3 weeks
B
Consider the following conditions for an item used in the Hess Company's manufacturing process: On-hand inventory: 80 units Open orders (scheduled receipts): 100 units Backorders: 20 units What is Hess's inventory position for this item? A) 200 units B) 160 units C) 180 units D) 80 units
B
Items, such as components or assemblies, needed to manufacture a final product are called: A) quarantined materials B) work-in-process C) raw materials D) finished goods
B
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? A) They will be reduced by a factor of 1.41. B) They will not change. C) They will be reduced by a factor of 2.00. D) They will be increased by a factor of 1.41.
B
What is generally true about the class C SKUs in ABC analysis? They represent about: A) 20 percent of all SKUs. B) 50 percent of all SKUs. C) 15 percent of the dollar usage. D) 50 percent of the dollar usage.
B
Which of the following does not increase repeatability? A) parts standardization B) customization C) group technology D) flexible automation
B
Which of the following generates pressure to increase inventories? A) inventory holding costs B) ordering costs C) storage and handling costs D) taxes and insurance
B
Which one of the following descriptions of a base-stock system is best? A) It is particularly attractive when review and ordering costs are both significant. B) It can be seen as a way to minimize cycle inventory. C) Examples include gasoline storage tanks at a service station. D) An item's inventory is stored at two different locations or "bins."
B
Which one of the following is NOT a method for tracking inventory and ensuring accurate records? A) assigning responsibility to specific employees for issuing and receiving materials B) updating the reorder points to minimize safety stock C) cycle counting D) logic error checks
B
Which one of the following statements about inventory control systems is true? A) A two-bin inventory system is essentially a P system because the inventory is reviewed only on a periodic basis. B) An optional replenishment system is particularly attractive when both review and ordering costs are significant. C) Visual systems are difficult to administer because records on current inventory position have to be kept for every item. D) Overstocking is quite common for those items that are managed by using the base-stock system.
B
Which one of the following statements concerning the economic order quantity (EOQ) is TRUE? A) The EOQ is the order quantity that minimizes annual inventory holding costs. B) An increase in demand will increase the EOQ. C) The time between orders (TBO) will increase with an increase in holding costs. D) The EOQ formula assumes that there are only three relevant costs: holding, transportation, and setup.
B
Which one of the following statements regarding the economic order quantity (EOQ) is TRUE? A) The EOQ model combines several different item orders to the same supplier. B) If an order quantity is larger than the EOQ, the annual holding cost for cycle inventory exceeds the annual ordering cost. C) The EOQ model assumes a variable demand pattern. D) When the interest rate drops, the inventory holding cost decreases and the EOQ decreases.
B
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? A) Their order quantity will fall and so will the time between orders. B) Their order quantity will fall but the time between orders will rise. C) Their order quantity will rise but the time between orders will fall. D) Their order quantity will rise and so will the time between orders.
C
Consider the following conditions for an item used in the Hess Company's manufacturing process: On-hand inventory: 40 units Open orders (scheduled receipts): 100 units Backorders: 60 units What is Hess's inventory position for this item? A) 200 units B) 140 units C) 80 units D) 40 units
C
Inventories needed for the production of services and goods (inputs to a firm's transformation processes) are called: A) quarantined materials B) work-in-process C) raw materials D) finished goods
C
What is generally true about the class B SKUs in ABC analysis? They represent about: A) 20 percent of all SKUs and about 80 percent of the dollar usage. B) 80 percent of all SKUs and about 20 percent of the dollar usage. C) 30 percent of all SKUs and about 15 percent of the dollar usage. D) 50 percent of all SKUs and about 95 percent of the dollar usage.
C
What is generally true about the class C SKUs in ABC analysis? They represent about: A) 20 percent of all SKUs. B) 30 percent of all SKUs. C) 5 percent of the dollar usage. D) 50 percent of the dollar usage.
C
Which one of the following statements concerning the economic order quantity (EOQ) model is TRUE? A) An increase in holding cost will increase the EOQ. B) A decrease in demand will increase the EOQ. C) A decrease in holding cost will increase the EOQ. D) None of the above is true.
C
Which one of the following statements is best? A) The level of safety stock maintained decreases when the desired cycle-service level increases. B) The level of safety stock maintained decreases when the standard deviation of demand during lead-time increases. C) When no safety stock is maintained, stockouts will occur during approximately 50% of the cycles. D) The level of safety stock maintained is greater if mean absolute deviation (MAD) is used rather than standard deviation in estimating forecast errors.
C
Which one of the following statements represents an advantage of the P system over the Q system? A) Less safety stock is carried to achieve the same service level. B) The replenishment intervals can be more easily individualized for items. C) Orders can be more easily combined to the same supplier. D) A P system is more suitable for quantity discounts and capacity limitations.
C
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 wouldn't use the EOQ formula if: A) you followed a make-to-stock strategy for an item with stable demand. B) your carrying costs and ordering costs are known and relatively stable. C) the order size is constrained by capacity limitations such as the number or size of the delivery trucks. D) your setup costs and holding costs remain constant and can be determined.
C
) 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? A) How critical are errors in estimating demand (D), inventory holding cost (H), and setup cost (S)? B) What should happen to lot sizes if interest rates drop? C) What should happen to cycle inventory if the demand rate increases? D) What should happen to lot sizes if supply and lead-time uncertainty increase?
D
ABC analysis is closely related to: A) three-bin analysis. B) EOQ analysis. C) repeatability analysis. D) Pareto analysis.
D
An inventory system answers two important questions: when to order and how much to order. Which of the following statements correctly explains how a Q system (continuous review system) or a P system (periodic review system) answers these questions? A) Under a Q system, a fixed quantity is ordered every P time period. B) Under a Q system, an order is placed to replenish the inventory position up to the target level T when the inventory position reaches the reorder point R. C) Under a P system, a fixed quantity Q is ordered when the inventory position reaches the reorder point R. D) Under a P system, an order is placed to replenish the inventory position up to the target level T every P time periods.
D
Consider the following conditions for an item used in the Hess Company's manufacturing process: On-hand inventory: 40 units Open orders (scheduled receipts): 100 units Backorders: 60 units Reorder point: 100 units Quantity per order: 50 units Which of the following statements best describes Hess's situation regarding inventory replenishment? A) No action is required, since a scheduled receipt is due to be delivered to Hess. B) To cover its backorders, Hess should order two lots of 50 units. C) Because it is incurring backorders, Hess should increase its reorder point. D) Hess should place an order for 50 units, since the inventory position is less than the reorder point.
D
Items sold to a firm's customers are called: A) quarantined materials B) work-in-process C) raw materials D) finished goods
D
One of the secondary levers for reducing pipeline inventory is to: A) offer seasonal pricing plans. B) increase capacity cushions. C) accept only large orders. D) select more responsive suppliers
D
The Lemming Company implements an aggressive marketing campaign and effectively doubles the annual demand for Model 13s. Their total annual holding cost should: A) decrease by 50%. B) increase by 100%. C) stay the same. D) increase by 40%.
D
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? A) less than or equal to $650 B) more than $650 and less than $1,050 C) more than $1,050 and less than $1,450 D) more than $1,450
D
What is generally true about the class A SKUs in ABC analysis? They represent about: A) 20 percent of all SKUs. B) 30 percent of all SKUs. C) 20 percent of the dollar usage. D) 50 percent of the dollar usage.
D
What is generally true about the class A SKUs in ABC analysis? They represent about: A) 50 percent of all SKUs. B) 80 percent of all SKUs. C) 20 percent of the dollar usage. D) 80 percent of the dollar usage
D
Which of the following DOES NOT generate pressure to decrease inventories? A) taxes and insurance B) inventory holding costs C) storage and handling costs D) ordering costs
D
Which one of the following descriptions best defines the cycle-service level as a measure of customer service? A) the preferred proportion of annual demand instantaneously filled from stock B) the number of stockouts tolerated per year C) the preferred proportion of days in the year when an item is in stock D) the desired probability of not running out of stock in any one inventory cycle
D
Which one of the following is not an assumption of the EOQ model? A) Decisions for one item can be made independently of decisions made for other items. B) There is no uncertainty in lead-time. C) The amount of an order received is exactly equal to what was ordered, without any "short shipments" from a supplier or scrap losses in the shop. D) Quantity discounts can be taken advantage of for large lot sizes.
D
Which one of the following statements concerning a continuous review system is best? A) The inventory position (IP) of an item measures the item's ability to satisfy future demand, relying only on the on-hand inventory. B) An item's inventory position under a continuous review system increases by Q units as soon as an order is received. C) An item's on-hand inventory increases by Q units as soon as an order is placed. D) Under a continuous review system, an item's inventory position corresponds to the on-hand inventory unless there are backorders or one or more scheduled receipts.
D
Which one of the following statements represents an advantage of a Q system over the P system? A) A perpetual inventory system is not mandatory. B) Orders for multiple items from the same supplier can be combined more easily. C) Fixed replenishment intervals are possible, which can be, administratively, quite convenient. D) The Q system is more suited for quantity discounts and physical limitations.
D
