Chapter 11 quiz

In a price break model of lot sizing, to find the lowest-cost order quantity, it is sometimes necessary to calculate the economic order quantity for each possible price and to check to see whether the lowest cost quantity is feasible.

t Step 1. Sort the prices from lowest to highest and then, beginning with the lowest price, calculate the economic order quantity for each price level until a feasible economic order quantity is found. By feasible, we mean that the price is in the correct corresponding range. Step 2. If the first feasible economic order quantity is for the lowest price, this quantity is best and you are finished. Otherwise, calculate the total cost for the first feasible economic order quantity (you did these from lowest to highest price) and also calculate the total cost at each price break lower than the price associated with the first feasible economic order quantity. This is the lowest order quantity at which you can take advantage of the price break. The optimal Q is the one with the lowest cost.

One of the basic purposes of inventory analysis in manufacturing and stockkeeping services is to specify when items should be ordered.

t The basic purpose of inventory analysis in manufacturing and stockkeeping services is to specify (1) when items should be ordered and (2) how large the order should be.

Which of the following is usually included as an inventory holding cost?

Breakage Holding costs include the costs for storage facilities, handling, insurance, pilferage, breakage, obsolescence, depreciation, taxes, and the opportunity cost of capital.

If demand for an item is normally distributed, we plan for demand to be twice the average demand and carry two standard deviations worth of safety stock inventory.

False Companies using the probability approach generally set the probability of not stocking out at 95 percent. This means we would carry about 1.64 standard deviations of safety stock

The fixed-time period inventory system has a smaller average inventory than the fixed-order quantity system because it must also protect against stockouts during the review period when inventory is checked.

False Fixed-time period model has a larger average inventory because it must also protect against stockout during the review period, T; the fixed-order quantity model has no review period.

Fixed-order quantity systems assume a random depletion of inventory, with less than an immediate order when a reorder point is reached.

False The fixed-order quantity system focuses on order quantities and reorder points. Procedurally, each time a unit is taken out of stock, the withdrawal is logged and the amount remaining in inventory is immediately compared to the reorder point. If it has dropped to this point, an order for Q items is placed. If it has not, the system remains in an idle state until the next withdrawal.

In order to determine the standard deviation of usage during lead time in the reorder point formula for a fixed-order quantity inventory model, which of the following must be computed first?

Standard deviation of daily demand

Fixed-time period inventory models are "time triggered."

T The basic distinction is that fixed-order quantity models are "event triggered" and fixed-time period models are "time triggered."

The fixed-order quantity inventory model is more appropriate for important items such as critical repair parts because there is closer monitoring and therefore quicker response to a potential stockout.

T The fixed-order quantity model is more appropriate for important items such as critical repair parts because there is closer monitoring and therefore quicker response to potential stockout.

If annual demand is 35,000 units, the ordering cost is $50 per order, and the holding cost is $0.65 per unit per year, which of the following is the optimal order quantity using the fixed-order quantity model?

2,320 From equation 11.4, Q = 2,320.5 = Square root of (2 × 35,000 × 50 / 0.65)

Which of the following values for z should we use in as safety stock calculation if we want a service probability of 98%?

2.05 Using the Excel function NORMSINV, the z-score for a 98% service probability is 2.05.

If it takes a supplier four days to deliver an order once it has been placed and the standard deviation of daily demand is 10, which of the following is the standard deviation of usage during lead time?

20 From equation 11.9, The standard deviation of usage during lead time is equal to the square root of the sums of the variances of the number of days of lead time. Since variance equals standard deviation squared, the standard deviation of usage during lead time is the square root of 4(10x10) = square root of 400 = 20.

A company has recorded the last five days of daily demand on their only product. Those values are 120, 125, 124, 128, and 133. The time from when an order is placed to when it arrives at the company from its vendor is 5 days. Assuming the basic fixed-order quantity inventory model fits this situation and no safety stock is needed, which of the following is the reorder point (R)?

630 Using equation 11.5, Average demand is 120+125+124+128+133 / 5 = 126. Lead time = 5 days so the reorder point is 126 x 5 = 630.

Using the fixed-time period inventory model, and given an average daily demand of 75 units, 10 days between inventory reviews, 2 days for lead time, 50 units of inventory on hand, a service probability of 95 percent, and a standard deviation of demand over the review and lead time of 8 units, which of the following is the order quantity?

863 The z score for a service probability of 95% is 1.64. Using equation 11.12, q = 75 x (10 + 2) + (1.64 x 8) - 50 = 900 + 13.12 - 50 = 863.12 = 863

You would like to use the fixed-time period inventory model to compute the desired order quantity for a company. You know that vendor lead time is 5 days and the number of days between reviews is 7. Which of the following is the standard deviation of demand over the review and lead time if the standard deviation of daily demand is 8?

About 27.7 Using equation 11.13, The standard deviation of demand over the 12 days of time between reviews and lead time is the square root of (12 x 64) = 27.71.

A company wants to determine its reorder point (R). Demand is variable and they want to build a safety stock into R. If the average daily demand is 12, the lead time is 5 days, the desired z value is 1.96, and the standard deviation of usage during lead time is 3, which of the following is the desired value of R?

About 66 Equation 11.6 is (average daily demand times number of days of lead time) plus (standard deviation during lead time) times (desired z-score) =(12 × 5) + (3 × 1.96) = 60 + 5.88 = 65.88 = 66 units