ISDS Chapter 12

1. According to the global company profile, Amazon.com's advantage in inventory management comes from its almost fanatical use of economic order quantity and safety stock calculations.

False

14. Insurance and taxes on inventory are part of the costs known as setup or ordering costs.

False

16. The EOQ model is best suited for items whose demand is dependent on other products.

False

17. In the simple EOQ model, if annual demand were to increase, the EOQ would increase proportionately.

False

18. At the economic order quantity, holding costs are equal to purchasing costs.

False

19. In the simple EOQ model, if the carrying cost were to double, the EOQ would also double.

False

23. In the quantity discount model, the cost of acquiring goods (product cost) is not a factor in determining lot size.

False

26. Safety stock in inventory systems depends only on the average demand during the lead time.

False

3. Which item to order and with which supplier the order should be placed are the two fundamental issues in inventory management.

False

5. Work-in-process inventory is devoted to maintenance, repair, and operations.

False

6. ABC analysis classifies inventoried items into three groups, usually based on annual units or quantities used.

False

8. ABC analysis is based on the presumption that carefully controlling all items is necessary to produce important inventory savings.

False

9. Cycle counting is an inventory control technique exclusively used for cyclical items.

False

10. One advantage of cycle counting is that it maintains accurate inventory records.

True

11. In cycle counting, the frequency of item counting and stock verification usually varies from item to item depending upon the item's classification.

True

12. Retail inventory that is unaccounted for between receipt and time of sale is known as shrinkage.

True

13. The demand for automobiles would be considered an independent demand.

True

15. If setup costs are reduced by substantial reductions in setup time, the production order quantity is also reduced.

True

2. A major challenge in inventory management is to maintain a balance between inventory investment and customer service.

True

20. 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 lot size than in an otherwise identical EOQ problem.

True

21. The reorder point is the inventory level at which action is taken to replenish the stocked item.

True

22. In the quantity discount model, it is possible to have a cost-minimizing solution where annual ordering costs do not equal annual carrying costs.

True

24. Service level is the complement of the probability of a stockout.

True

25. Units of safety stock are additions to the reorder point that allow for variability in the rate of demand, the length of lead time, or both.

True

27. The fixed-period inventory model can have a stockout during the review period as well as during the reorder period, which is why fixed-period models require more safety stock than fixed-quantity models.

True

4. One function of inventory is to take advantage of quantity discounts.

True

7. In ABC analysis, "A" Items are the most tightly controlled.

True

74. The fixed-period inventory model requires more safety stock than the fixed-quantity models because

a. a stockout can occur during the review period as well as during the lead time

46. In the basic EOQ model, if the cost of placing an order doubles, and all other values remain constant, the EOQ will

a. increase by about 41%

53. A product has 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 costs.

b. $800

54. A product has 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

b. 200 units per order

57. 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?

b. Fourteen is the reorder point, and 100 is the order quantity.

58. Which of the following statements regarding the production order quantity model is true?

b. It relaxes the assumption that all the order quantity is received at one time.

28. Which of the following statements regarding Amazon.com is false?

b. The company was founded as, and still is, a "virtual retailer" with no inventory.

A product whose EOQ is 400 experiences a 50% increase in demand. The new EOQ is

b. increased by less than 50%

50. A product whose EOQ is 40 experiences a decrease in ordering cost from $90 per order to $10. The revised EOQ is

b. one-third as large

34. ABC analysis is based upon the principle that

b. there are usually a few critical items, and many items which are less critical

76. An advantage of the fixed-period inventory system is that

b. there is no physical count of inventory items when an item is withdrawn

52. For a certain item, the cost-minimizing order quantity obtained with the basic EOQ model was 200 units and the total annual inventory (carrying and setup) cost was $600. The inventory carrying cost per unit per year for this item is

c. $3.00

44. A certain type of computer costs $1,000, and the annual holding cost is 25%. Annual demand is 10,000 units, and the order cost is $150 per order. What is the approximate economic order quantity?

c. 110

47. In the basic EOQ model, if D=6000 per year, S=$100, H=$5 per unit per month, the economic order quantity is approximately

c. 141

37. Which of the following statements regarding control of service inventories is true?

c. Effective control of all goods leaving the facility is one applicable technique.

43. 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

c. is one-half of the economic order quantity

36. Cycle counting

c. provides a measure of inventory turnover

38. The two most basic inventory questions answered by the typical inventory model are

c. timing and quantity of orders

45. Most inventory models attempt to minimize

c. total inventory based costs

32. Which of the following statements about ABC analysis is false?

d. ABC analysis is based on the presumption that all items must be tightly controlled to produce important cost savings.

59. Which of these statements about the production order quantity model is false?

d. All else equal, the smaller the ratio of demand rate to production rate, the larger is the production order quantity.

49. Which of the following statements about the basic EOQ model is false?

d. If annual demand were to double, the EOQ would also double.

41. Which of the following is not an assumption of the economic order quantity model shown below?

d. Production and use can occur simultaneously.

64. Which of the following statements about quantity discounts is false?

d. The larger annual demand, the less attractive a discount schedule will be.

70. If demand is not uniform and constant, then stockout risks can be controlled by

d. adding safety stock

39. Among the advantages of cycle counting is that it

d. allows more rapid identification of errors and consequent remedial action than is possible with annual physical inventory

68. The purpose of safety stock is to

d. control the likelihood of a stockout due to the variability of demand during lead time

56. The EOQ model with quantity discounts attempts to determine

d. how many units should be ordered

33. All of the following statements about ABC analysis are true except

d. it states that all items require the same degree of control

31. Which of the following is not one of the four main types of inventory?

d. safety stock inventory

69. The proper quantity of safety stock is typically determined by

d. setting the level of safety stock so that a given stockout risk is not exceeded

A disadvantage of the fixed-period inventory system is that

d. since there is no count of inventory during the review period, a stockout is possible

30. Which of the following would not generally be a motive for a firm to hold inventories?

d. to minimize holding costs

42. The primary purpose of the basic economic order quantity model shown below is

d. to minimize the sum of setup cost and holding cost

40. Which of the following are elements of inventory holding costs?

e. All of the above are elements of inventory holding cost.

29. Which of the following is a function of inventory?

e. All of the above are functions of inventory.

55. Which of the following statements regarding the reorder point is true?

e. All of the above are true.

48. Which of the following statements about the basic EOQ model is true?

e. All of the above statements are true.

35. ABC analysis divides on-hand inventory into three classes, generally based upon

e. annual dollar volume

63. When quantity discounts are allowed, the cost-minimizing order quantity

e. minimizes the sum of holding, ordering, and product costs

62. Which category of inventory holding costs is much higher than average for rapid-change industries such as PCs and cell phones?

e. pilferage, scrap, and obsolescence