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Chapter 11 (4) OPMA

Inventory is defined as the stock of any item or resource used in an organization.
True
An inventory system is a set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be.
True
One of the basic purposes of inventory analysis in manufacturing and stockkeeping services is to specify when items should be ordered.
True
One of the basic purposes of inventory analysis in manufacturing and stockkeeping services is to determine the level of quality to specify.
False
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.
One of the basic purposes of inventory analysis in manufacturing and stockkeeping services is to determine how large the orders to vendors should be.
True
In inventory models, high holding costs tend to favor high inventory levels.
False

Holding (or carrying) costs. This broad category includes the costs for storage facilities, handling, insurance, pilferage, breakage, obsolescence, depreciation, taxes, and the opportunity cost of capital. Obviously, high holding costs tend to favor low inventory levels and frequent replenishment.

In inventory models, high holding costs tend to favor low inventory levels and frequent replenishment.
True
If the cost to change from producing one product to producing another were zero the lot size would be very small.
True
Shortage costs are precise and easy to measure.
False

When the stock of an item is depleted, an order for that item must either wait until the stock is replenished or be canceled. There is a trade-off between carrying stock to satisfy demand and the costs resulting from stockout. This balance is sometimes difficult to obtain, because it may not be possible to estimate lost profits, the effects of lost customers, or lateness penalties.

Dependent demand inventory levels are usually managed by calculations using calculus-driven, cost-minimizing models.
False

Independent demand, the need for any one item is a direct result of the need for some other item, usually a higher-level item of which it is part.

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.

The fixed-order quantity inventory model favors less expensive items because average inventory is lower.
False

The fixed-order quantity model favors more expensive items because average inventory is lower.

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.
True
The fixed-order quantity inventory model requires more time to maintain because every addition or withdrawal is logged.
True
Fixed-order quantity inventory models are “event triggered.”
True
Fixed-order quantity inventory models are “time triggered.”
False

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

Fixed-time period inventory models are “event triggered.”
False

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

Fixed-time period inventory models are “time triggered.”
True
Fixed-order quantity inventory systems determine the reorder point, R and the order quantity, Q values.
True
The computation of a firm’s inventory position is found by taking the inventory on hand and adding it to the on-order inventory, and then subtracting back-ordered inventory.
True
Using the probability approach we assume that the demand over a period of time is normally distributed.
True
Safety stock can be defined as the amount of inventory carried in addition to the expected demand.
True
If demand for an item is normally distributed we plan for demand to be twice the average demand and carry 2 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.

Safety stock can be computed when using the fixed-order quantity inventory model by multiplying a “z” value representing the number of standard deviations to achieve a service level or probability by the standard deviation of periodic demand.
True
The key difference between a fixed-order quantity inventory model, where demand is known and one where demand is uncertain is in computing the reorder point.
True
Fixed-time period inventory models generate order quantities that vary from time period to time period, depending on the usage rate.
True
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.

The standard fixed-time period model assumes that inventory is never counted but determined by EOQ measures.
False

Fixed-time period models generate order quantities that vary from period to period, depending on the usage rates. The standard fixed-time period models assume that inventory is counted only at the time specified for review

Safety stock is not necessary in any fixed-time period system.
False

Fixed-time period models generate order quantities that vary from period to period, depending on the usage rates. These generally require a higher level of safety stock than a fixed-order quantity system.

In the fixed-time period model it is necessary to determine the inventory currently on hand to calculate the size of the order to place with a vendor.
True
Some inventory situations involve placing orders to cover only one demand period or to cover short-lived items at frequent intervals.
True
The optimal stocking decision in inventory management, when using marginal analysis, occurs at the point where the benefits derived from carrying the next unit are more than the costs for that unit.
False

The optimal stocking level, using marginal analysis, occurs at the point where the expected benefits derived from carrying the next unit are less than the expected costs for that unit.

When stocked items are sold, the optimal inventory decision using marginal analysis is to stock that quantity where the probable profit from the sale or use of the last unit is equal to or greater than the probable losses if the last unit remains unsold.
True
Cycle counting is a physical inventory-taking technique in which inventory is counted on a frequent basis rather than once or twice a year.
True
The “sawtooth effect,” named after turn-around artist Al “chainsaw” Dunlap, is the severe reduction of inventory and service levels that occurs when a firm has gone through a hostile takeover.
False

The “sawtooth effect” relating Q and R in Exhibit 11.5 shows that when the inventory position drops to point R, a reorder is placed.

The “sawtooth effect,” is named after the jagged shape of the graph of inventory levels over time.
True
Price-break models deal with the fact that the selling price of an item varies with the order size.
True
Price-break models deal with the fact that the selling price of an item generally increases as the order size increases.
False

Price-break models deal with the fact that, generally, the selling price of an item varies with the order size.

Price-break models deal with discrete or step changes in price as order size changes rather than a per-unit change.
True
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.
True
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.
True
In a price break model of lot sizing the lowest cost quantity is always feasible.
False

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 drivers of the direct-to-store (direct distribution) approach is the upstream migration of value-added logistics services.
True
One of the drivers of the direct-to-store (direct distribution) approach is the increase in global sourcing.
True
One of the drivers of the direct-to-store (direct distribution) approach is the decrease in trucking industry regulation.
False

What accounts for the emergence of the direct-to-store model? Global sourcing and the upstream migration of value-added logistics services are certainly primary drivers.

You should visualize inventory as stacks of money sitting on forklifts, on shelves, and in trucks and planes while in transit.
True
One of the daily, delicate balancing acts that Logistics managers have to perform involves the trade-off between transportation costs and fulfillment speed.
True
One of the daily, delicate balancing acts that Logistics managers have to perform involves the trade-off between customer satisfaction and cost to serve.
True
One of the daily, delicate balancing acts that Logistics managers have to perform involves the trade-off between inventory costs and the cost of stock-outs.
True
The average cost of inventory in the United States is 20 to 25 percent of its value.
False

The average cost of inventory in the United States is 30 to 35 percent of its value.

Savings from reduced inventory results in increased profit.
True
The costs associated with reduced inventory results in lower profits.
False

Savings from reduced inventory results in increased profit.

Which of the following is not one of the categories of manufacturing inventory?

A. Raw materials
B. Finished products
C. Component parts
D. Just-in-time
E. Supplies

D. Just-in-time
Which of the following is one of the categories of manufacturing inventory?

A. Economic Order Inventory
B. Work-in-process
C. Quality units
D. JIT Inventory
E. Re-order point

B. Work-in-process
Firms keep supplies of inventory for which of the following reasons?

A. To maintain dependence of operations
B. To provide a feeling of security for the workforce
C. To meet variation in product demand
D. To hedge against wage increases
E. In case the supplier changes the design

C. To meet variation in product demand
Which of the following is not a reason to carry inventory?

A. To provide a safeguard for variation in raw material delivery time
B. To take advantage of economic purchase-order size
C. To maintain independence of operations
D. To meet variation in product demand
E. To keep the stock out of the hands of competitors

E. To keep the stock out of the hands of competitors
When developing inventory cost models, which of the following are not included as costs to place an order?

A. Phone calls
B. Taxes
C. Clerical
D. Calculating quantity to order
E. Postage

B. Taxes
When material is ordered from a vendor, which of the following is not a reason for delays in the order arriving on time?

A. Normal variation in shipping time
B. A shortage of material at the vendor’s plant causing backlogs
C. An unexpected strike at the vendor’s plant
D. A lost order
E. Redundant ordering systems

E. Redundant ordering systems

When material is ordered from a vendor, delays can occur for a variety of reasons: a normal variation in shipping time, a shortage of material at the vendor’s plant causing backlogs, an unexpected strike at the vendor’s plant or at one of the shipping companies, a lost order, or a shipment of incorrect or defective material.

Which of the following is not included as an inventory holding cost?

A. Annualized cost of materials
B. Handling
C. Insurance
D. Pilferage
E. Storage facilities

A. Annualized cost of materials

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

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

A. Order placing

B. Breakage

C. Typing up an order

D. Quantity discounts

E. Annualized cost of materials

B. Breakage

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

In making any decision that affects inventory size, which of the following costs do not need to be considered?

A. Holding costs

B. Setup costs

C. Ordering costs

D. Fixed costs

E. Shortage costs

D. Fixed costs

In making any decision that affects inventory size, the following costs must be considered.

1. Holding (or carrying) costs.
2. Setup (or production change) costs.
3. Ordering costs.
4. Shortage costs.

Which of the following are fixed-order quantity inventory models?

A. Economic order quantity model

B. The ABC model

C. Periodic replenishment model

D. Cycle counting model

E. P model

A. Economic order quantity model
Which of the following are fixed-time period inventory models?

A. The EOQ model

B. The least cost method

C. The Q model

D. Periodic system model

E. Just-in-time model

D. Periodic system model
Which of the following is a perpetual system for inventory management?

A. Fixed-time period

B. Fixed-order quantity

C. P model

D. First-in-first-out

E. The wheel of inventory

B. Fixed-order quantity

The fixed-order quantity model is a perpetual system, which requires that every time a withdrawal from inventory or an addition to inventory is made, records must be updated to reflect whether the reorder point has been reached.

Which of the following is an assumption of the basic fixed-order quantity inventory model?

A. Lead times are averaged

B. Ordering costs are variable

C. Price per unit of product is constant

D. Back orders are allowed

E. Stock-out costs are high

C. Price per unit of product is constant

These assumptions are unrealistic, but they represent a starting point and allow us to use a simple example:

1. Demand for the product is constant and uniform throughout the period.
2. Lead time (time from ordering to receipt) is constant.
3. Price per unit of product is constant.
4. Inventory holding cost is based on average inventory.
5. Ordering or setup costs are constant.
6. All demands for the product will be satisfied. (No backorders are allowed.)

Which of the following is not an assumption of the basic fixed-order quantity inventory model?

A. Ordering or setup costs are constant

B. Inventory holding cost is based on average inventory

C. Diminishing returns to scale of holding inventory

D. Lead time is constant

E. Demand for the product is uniform throughout the period

C. Diminishing returns to scale of holding inventory

These assumptions are unrealistic, but they represent a starting point and allow us to use a simple example:

1. Demand for the product is constant and uniform throughout the period.
2. Lead time (time from ordering to receipt) is constant.
3. Price per unit of product is constant.
4. Inventory holding cost is based on average inventory.
5. Ordering or setup costs are constant.
6. All demands for the product will be satisfied. (No backorders are allowed.)

Which of the following is the symbol used in the textbook for the cost of placing an order in the fixed-order quantity inventory model?

A. C

B. TC

C. H

D. Q

E. S

E. S

S = Setup cost or cost of placing an order

Which of the following is the set of all cost components that make up the fixed-order quantity total annual cost (TC) function?

A. Annual purchasing cost, annual ordering cost, fixed cost

B. Annual holding cost, annual ordering cost, unit cost

C. Annual holding cost, annual ordering cost, annual purchasing cost

D. Annual lead time cost, annual holding cost, annual purchasing cost

E. Annual unit cost, annual set up cost, annual purchasing cost

C. Annual holding cost, annual ordering cost, annual purchasing cost

Total Annual Cost = Annual Purchase Cost + Annual Ordering Cost + Annual Holding Cost.

Assuming no safety stock, what is the re-order point (R) given an average daily demand of 50 units, a lead time of 10 days and 625 units on hand?

A. 550

B. 500

C. 715

D. 450

E. 475

B. 500

Fifty (50) times ten (10) equals 500.

Assuming no safety stock, what is the reorder point (R) given an average daily demand of 78 units and a lead time of 3 days?

A. 421

B. 234

C. 78

D. 26

E. 312

B. 234
78 times 3 = 234
If annual demand is 12,000 units, the ordering cost is $6 per order and the holding cost is $2.50 per unit per year, which of the following is the optimal order quantity using the fixed-order quantity model?

A. 576

B. 240

C. 120.4

D. 60.56

E. 56.03

B. 240

240 = Square root of (2 x 12,000 x 6/2.5)

If annual demand is 50,000 units, the ordering cost is $25 per order and the holding cost is $5 per unit per year, which of the following is the optimal order quantity using the fixed-order quantity model?

A. 909

B. 707

C. 634

D. 500

E. 141

B. 707

Q = 707.1 = Square root of (2 x 50,000 x 25/5)

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?

A. 5,060

B. 2,320

C. 2,133

D. 2,004

E. 1,866

B. 2,320

Q = 2,320.5 = Square root of (2 x 35,000 x 50/0.65)

Using the fixed-order quantity model, which of the following is the total ordering cost of inventory given an annual demand of 36,000 units, a cost per order of $80 and a holding cost per unit per year of $4?

A. $849

B. $1,200

C. $1,889

D. $2,267

E. $2,400

E. $2,400

1,200 = Square root of (2 x 36,000 x 80/4). Number of orders per year = 36,000/1,200 = 30 x $80 = $2,400

A company is planning for its financing needs and uses the basic fixed-order quantity inventory model. Which of the following is the total cost (TC) of the inventory given an annual demand of 10,000, setup cost of $32, a holding cost per unit per year of $4, an EOQ of 400 units, and a cost per unit of inventory of $150?

A. $1,501,600

B. $1,498,200

C. $500,687

D. $499,313

E. None of the above

A. $1,501,600

Q = 400. Average Inventory = Q/2 = 200. Holding cost/year = $4. Thus, annual holding cost = $800. Annual set-up cost = 10,000/400 = 25 x $32 = 800. Demand x cost per unit = 10,000 x $150 = 1,500,000. Hence, TC = $1,500,000 + 800 + 800 = $1,501,600.

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)?

A. 120

B. 126

C. 630

D. 950

E. 1,200

C. 630

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

A company has recorded the last six days of daily demand on a single product they sell. Those values are 37, 115, 93, 112, 73, and 110. The time from when an order is placed to when it arrives at the company from its vendor is 3 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)?

A. 540

B. 270

C. 115

D. 90

E. 60

B. 270
Average demand is 37 + 115 + 93 + 112 + 73 + 110/6 = 90. Lead time = 3 days so the reorder point is 90 x 3 = 270.
Using the probability approach to determine an inventory safety stock and wanting to be 95 percent sure of covering inventory demand, which of the following is the number of standard deviations necessary to have the 95 percent service probability assured?

A. 1.28

B. 1.64

C. 1.96

D. 2.00

E. 2.18

B. 1.64

Companies using this 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,

To take into consideration demand uncertainty in reorder point (R) calculations, what do we add to the product of the average daily demand and lead time in days when calculating the value of R?

A. The product of average daily demand times a standard deviation of lead time

B. A “z” value times the lead time in days

C. The standard deviation of vendor lead time times the standard deviation of demand

D. The product of lead time in days times the standard deviation of lead time

E. The product of the standard deviation of demand variability and a “z” score relating to a specific service probability.

E. The product of the standard deviation of demand variability and a “z” score relating to a specific service probability.
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?

A. Standard deviation of daily demand

B. Number of standard deviations for a specific service probability

C. Stockout cost

D. Economic order quantity

E. Safety stock level

A. Standard deviation of daily demand
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?

A. 10

B. 20

C. 40

D. 100

E. 400

B. 20

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(10×10) = square root of 400 = 20.

If it takes a supplier 25 days to deliver an order once it has been placed and the standard deviation of daily demand is 20, which of the following is the standard deviation of usage during lead time?

A. 50

B. 100

C. 400

D. 1,000

E. 1,600

B. 100

the standard deviation of usage during lead time will be the square root of (25 x (20 x 20)) = square root of 10,000 = 100

If it takes a supplier two days to deliver an order once it has been placed and the daily demand for three days has been 120, 124, and 125, which of the following is the standard deviation of usage during lead time?

A. About 2.16

B. About 3.06

C. About 4.66

D. About 5.34

E. About 9.30

B. About 3.06

The standard deviation (Equation 11.6) of daily demand = Square root of (14/3) = 2.1602. This number squared is 4.6667. The square root of (2 (days) times 4.6667) = the square root of 9.3333 or 3.055.

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?

A. About 6

B. About 16

C. About 61

D. About 66

E. About 79

D. About 66

(average daily demand times number of days of lead time) plus (standard deviation during lead time) times (desired Z score) =
(12 x 5) + (3 x 1.96) = 60 + 5.88 = 65.88 = 66 units

A company wants to determine its reorder point (R). Demand is variable and they want to build a safety stock into R. The company wants to have a service probability coverage of 95 percent. If average daily demand is 8, lead time is 3 days, and the standard deviation of usage during lead time is 2, which of the following is the desired value of R?

A. About 17.9

B. About 19.7

C. About 24.0

D. About 27.3

E. About 31.2

D. About 27.3

Desired z score for service probability coverage of 95% = 1.64. Equation 11.5 is (average daily demand times number of days of lead time) plus (standard deviation during lead time) times (desired z score) = (8 x 3) + (2 x 1.64) = 24 + 3.28 = 27.28 = about 27.3 units

Which of the following is not necessary to compute the order quantity using the fixed-time period model with safety stock?

A. Forecast average daily demand

B. Safety stock

C. Inventory currently on hand

D. Ordering cost

E. Lead time in days

D. Ordering cost

It requires:

1. The number of days between reviews
2. Lead time in days (time between placing an order and receiving it)
3. Forecast average daily demand
4. Number of standard deviations for a specified service probability
5. Standard deviation of demand over the review and lead time
6. Current inventory level (includes items on order)

Using the fixed-time period inventory model, and given an average daily demand of 200 units, 4 days between inventory reviews, 5 days for lead time, 120 units of inventory on hand, a “z” of 1.96, and a standard deviation of demand over the review and lead time of 3 units, which of the following is the order quantity?

A. About 1,086

B. About 1,686

C. About 1,806

D. About 2,206

E. About 2,686

B. About 1,686

q = (200 x (5 + 4) + 1.96 x 3) – 120 =
1,800 + 5.88 – 120 = 1,685.88 = about 1,686

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?

A. 863

B. 948

C. 1,044

D. 1,178

E. 4,510

A. 863

q = 75 x (10 + 2) + (1.64 x 8) – 50 = 900 + 13.12 – 50 = 863.12 = 863

Using the fixed-time period inventory model, and given an average daily demand of 15 units, 3 days between inventory reviews, 1 day for lead time, 30 units of inventory on hand, a service probability of 98 percent, and a standard deviation of daily demand is 3 units, which of the following is the order quantity?

A. About 30.4

B. About 36.3

C. About 42.3

D. About 56.8

E. About 59.8

C. About 42.3

q = 15 x (3 + 1) + (2.05 x 6) – 30 = 60 + 12.3 – 30 = 42.3

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?

A. About 27.7

B. About 32.8

C. About 35.8

D. About 39.9

E. About 45.0

A. About 27.7

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

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 10 days and the number of days between reviews is 15. Which of the following is the standard deviation of demand over the review and lead time period if the standard deviation of daily demand is 10?

A. 25

B. 40

C. 50

D. 73

E. 100

C. 50

the standard deviation of demand over the 25 days of time between reviews and lead time is the square root of (25 x 100) = 50

If a vendor has correctly used marginal analysis to select their stock levels for the day (as in the newsperson problem), and the profit resulting from the last unit being sold (Cu) is $0.90 and the loss resulting from that unit if it is not sold (Co) is $0.50, which of the following is the probability of the last unit being sold?

A. Greater than 0.357

B. Greater than 0.400

C. Greater than 0.556

D. Greater than 0.678

E. None of the above

A. Greater than 0.357

P < = Cu/(Cu + Co) = 0.90/1.40 = 0.643. Since P is the probability that the unit will not be sold and 1 - P is the probability of it being sold, the answer to this question is 1 - 0.643 or 0.357.

If a vendor has correctly used marginal analysis to select their stock levels for the day (as in the newsperson problem), and the profit resulting from the last unit being sold (Cu) is $120 and the loss resulting from that unit if it is not sold (Co) is $360, which of the following is the probability of the last unit being sold?

A. Greater than 0.90

B. Greater than 0.85

C. Greater than 0.75

D. Greater than 0.25

E. None of the above

C. Greater than 0.75

P < = Cu/(Cu + Co) = 120/480 = 0.25. Since P is the probability that the unit will not be sold and 1 - P is the probability of it being sold, the answer to this question is 1 - 0.25 or 0.75

The Pareto principle is best applied to which of the following inventory systems?

A. EOQ

B. Fixed-time period

C. ABC classification

D. Fixed-order quantity

E. Single-period ordering system

C. ABC classification
Which of the following are the recommended percentage groupings of the ABC classifications of the dollar volume of products?

A. A items get 15%, B items get 35%, and C items get 50%

B. A items get 15%, B items get 45%, and C items get 40%

C. A items get 25%, B items get 35%, and C items get 40%

D. A items get 25%, B items get 15%, and C items get 60%

E. A items get 20%, B items get 30%, and C items get 50%

A. A items get 15%, B items get 35%, and C items get 50%

The ABC approach divides this list into three groupings by value: A items constitute roughly the top 15 percent of the items, B items the next 35 percent, and C items the last 50 percent.

Using the ABC classification system for inventory, which of the following is a true statement?

A. The “C” items are of moderate dollar volume

B. You should allocate about 50 % of the dollar volume to “B” items

C. The “A” items are of low dollar volume

D. The “A” items are of high dollar volume

E. Inexpensive and low usage items are classified as “C” no matter how critical

D. The “A” items are of high dollar volume

The ABC classification scheme divides inventory items into three groupings: high dollar volume (A), moderate dollar volume (B), and low dollar volume (C).

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

A. 1.64

B. 1.96

C. 2.05

D. 2.30

E. None of the above

C. 2.05

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

Computer inventory systems are often programmed to produce a cycle count notice in which of the following case?

A. When the record shows a near maximum balance on hand

B. When the record shows positive balance but a backorder was written

C. When quality problems have been discovered with the item

D. When the item has become obsolete

E. When the item has been misplaced in the stockroom

B. When the record shows positive balance but a backorder was written

The computer can be programmed to produce a cycle count notice in the following cases:

1. When the record shows a low or zero balance on hand.
2. When the record shows a positive balance but a backorder was written
3. After some specified level of activity.
4. To signal a review based on the importance of the item (as in the ABC system)

What is the term for there being no relationship between demands for various items?
Independent demand

In independent demand, the demands for various items are unrelated to each other.

Assuming no safety stock, what is the reorder point (R) given an average daily demand of 100 units and a lead time of 5 days?
500

Reorder point = Average daily demand x Lead time in days = 100 x 5 = 500

If annual demand is 8,000 units, the ordering cost is $20 per order and the holding cost is $12.50 per unit per year, what is the optimal order quantity using the fixed-order quantity inventory model?
160

Q = square root of ((2 x demand x order cost)/holding cost) = Square root ((2 x 8,000 x 20)/12.50) = Square root (25,600) = 160

Using the fixed-time period inventory model, and given an average daily demand of 300 units, 4 days between inventory reviews, 5 days for lead time, 1,200 units of inventory on hand, a “z” of 1.96, and a standard deviation of demand over the review and lead time of 12 units, what quantity should be ordered?
1,525

q = (300 x (5 + 4) + 1.96 x 12) – 1200 =
2,700 + 23.52 – 1200 = 1,524.52 = about 1,525

Using the fixed-order quantity model, what is the total ordering cost of inventory given an annual demand of 36,000 units, a cost per order of $40 and a holding cost per unit per year of $45?
$5,692

Q = square root of ((2 x demand x order cost)/holding cost) = Square root ((2 x 36,000 x 40)/45) = Square root (64,000) = 252.98. Dividing annual demand by Q, 36,000/252.98 = 142.3 orders per year x $40 per order = $5,692 ordering cost per year.

If it takes a supplier 10 days to deliver an order once it has been placed and the standard deviation of daily demand is 14, what is the standard deviation of usage during lead time?
44.27

the answer is the square root of the sum of the variances which is the square root of 10 x (14 squared) or the square root of 1960 or 44.27.

What are the five purposes of inventory?
All firms keep a supply of inventory for the following reasons:

1. To maintain independence of operations
2. To meet variation in product demand.
3. To allow flexibility in production scheduling.
4. To provide a safeguard for variation in raw material delivery time.
5. To take advantage of economic purchase order size.

In making any decision that affects the size of inventory, what are the four categories of cost that must be considered?
In making any decision that affects inventory size, the following costs must be considered.

1. Holding (or carrying) costs.
2. Setup (or production change) costs.
3. Ordering costs.
4. Shortage costs.

What is the name of a physical inventory-taking technique that focuses only on certain items and counts more often than once or twice a year?
Cycle counting is a physical inventory-taking technique in which inventory is counted frequently rather than once or twice a year

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