Managing Inventory Converted (Answer Key)

Operations Management Chapter 9: Inventory Management 9.1 Inventory Trade-Offs 1) A quantity discount is attractive because there is a drop in the price per unit when the order is sufficiently large. Answer: TRUE 2) Inventory management is the planning and controlling of inventories in order to meet the competitive priorities of the organization. Answer: TRUE 3) When looking at inventory management, the term "lot size" refers to the physical dimensions of the area where the inventory is stored. Answer: FALSE 4) 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. Answer: TRUE 5) The primary reason for keeping inventories low is that inventory represents a temporary monetary investment. Answer: TRUE 6) One component of the holding cost of inventory is interest. Answer: TRUE 7) One component of the ordering cost of inventory is shrinkage. Answer: FALSE 8) A stock-out occurs when an item that is typically stocked is not available to satisfy a demand the moment it occurs. Answer: TRUE 9) A backorder occurs when a customer order cannot be filled when it is placed, but is instead filled later. Answer: TRUE 10) Setup cost is independent of order size. Answer: TRUE 11) Reducing setup costs will increase the pressure to keep large inventories. Answer: FALSE 12) Increasing inventory levels can sometimes help a firm reduce both its inbound and outbound transportation costs. Answer: TRUE 13) The term lot size signifies: 1. A) the total production of a single SKU for a one-year period. 2. B) the physical dimensions of the raw materials used to make a batch of one SKU. 3. C) the dimensions of the container used to ship an order to any location outside of company property. 4. D) the number of units of a single item that a company buys from a supplier. Answer: D 14) Which of the following generates pressure to increase inventories? 1. A) inventory holding costs 2. B) ordering costs 3. C) storage and handling costs 4. D) taxes and insurance Answer: B 15) Which of the following generates pressure to decrease inventories? 1. A) inventory shrinkage costs 2. B) backorders and stockouts 3. C) transportation costs 4. D) quantity discounts Answer: A 16) Which of the following does NOT generate pressure to decrease inventories? 1. A) taxes and insurance 2. B) inventory holding costs 3. C) storage and handling costs 4. D) ordering costs Answer: D 17) Which of the following does NOT generate pressure to increase inventories? 1. A) transportation costs 2. B) backorders and stockouts 3. C) inventory shrinkage costs 4. D) quantity discounts Answer: C 18) ________ is the planning and controlling of inventories in order to meet the competitive priorities of the organization. Answer: Inventory management 19) The term ________ refers to the quantity of an item that is purchased from a supplier; the term ________ is used to refer to the size of the batch that is produced using internal processes. Answer: lot size, lot size 20) ________ is the opportunity cost of investing in an asset relative to the expected return on assets of similar risk. Answer: Cost of capital 21) Inventory ________ cost is the variable cost of keeping items on hand, such as storage and handling, taxes, insurance, and shrinkage. Answer: holding 22) ________ occurs when inventory is stolen by employees and customers or when the inventory cannot be sold at full value owing to model changes or low demand. Answer: Shrinkage 23) A(n) ________ is an order that cannot be satisfied, resulting in the loss of a sale. Answer: stockout 24) A(n) ________ occurs when a customer order cannot be filled as promised or demanded but is filled later. Answer: backorder 25) ________ is the cost of preparing a purchase order for a supplier or a production order for manufacturing. Answer: Ordering cost 9.2 Types of Inventory 1) 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. Answer: FALSE 2) An experienced operations manager can tell at a glance whether an item should be classified as safety stock, anticipation inventory, or cycle stock. Answer: FALSE 3) 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. Answer: TRUE 4) Inventories needed for the production of services and goods (inputs to a firm's transformation processes) are called: 1. A) quarantined materials. 2. B) work-in-process. 3. C) raw materials. 4. D) finished goods. Answer: C 5) Items, such as components or assemblies, needed to manufacture a final product are called: 1. A) quarantined materials. 2. B) work-in-process. 3. C) raw materials. 4. D) finished goods. Answer: B 6) Items sold to a firm's customers are called: 1. A) quarantined materials. 2. B) work-in-process. 3. C) raw materials. 4. D) finished goods. Answer: D 7) Which of these statements about pipeline inventory is BEST? 1. A) Shorter lead times create more pipeline inventory. 2. B) Changing an item's lot size does not directly affect the average level of the pipeline inventory. 3. C) Pipeline inventory exists to avoid customer service problems. 4. D) Pipeline inventory is used to even out volatile fluctuations in supply or demand. Answer: B Scenario 9.1 Shipments of Product A from a distribution center to a retailer are made in lots of 350. The retailer's average demand for Product A is 75 units per week. The lead time from distributor to retailer is 3 weeks. The retailer pays for the shipments when they leave the distributor. The distributor has agreed to reduce the lead time to 2 weeks if the retailer will purchase quantities of 400 per shipment instead of 350 units per shipment. 8) Refer to Scenario 9.1. With the change in purchased quantities, the average cycle inventory will: 1. A) decrease by 75 units. 2. B) increase by 50 units. 3. C) decrease by 25 units. 4. D) increase by 25 units. Answer: D 9) Refer to Scenario 9.1. With the change in lead time, the pipeline inventory will: 1. A) decrease by 75 units. 2. B) increase by 50 units. 3. C) decrease by 25 units. 4. D) increase by 25 units. Answer: A 10) Refer to Scenario 9.1. The net impact on the retailer will be: 1. A) no net change in average cycle and pipeline inventories. 2. B) a net average increase in cycle and pipeline inventories of 50 units. 3. C) a net average decrease in cycle and pipeline inventories of 75 units. 4. D) a net average decrease in cycle and pipeline inventories of 50 units. Answer: D Scenario 9.2 Shipments of Product X from a plant to a wholesaler are made in lots of 600. The wholesaler's average demand for X is 100 units per week. The lead time from the plant to the wholesaler is 4 weeks. The wholesaler pays for the shipments when they leave the plant. 11) Refer to Scenario 9.2. What is the total of the wholesaler's current cycle plus pipeline inventories? 1. A) 300 units 2. B) 100 units 3. C) 700 units 4. D) 400 units Answer: C 12) Refer to Scenario 9.2. If the plant reduces its lead time from 4 to 2 weeks and keeps its 600 unit lot size, what is the wholesaler's new total cycle plus pipeline inventories? 1. A) 300 units 2. B) 500 units 3. C) 700 units 4. D) 200 units Answer: B 13) Refer to Scenario 9.2. If the plant reduces its shipment lot size from 600 to 400 units and keeps its 4 week lead time, what is the wholesaler's new total cycle plus pipeline inventories? 1. A) 600 units 2. B) 300 units 3. C) 500 units 4. D) 400 units Answer: A 14) Refer to Scenario 9.2. Which of the following situations results in the wholesaler's total cycle plus pipeline inventories amounting to 550 units? 1. A) The plant shipment lot size of 400 and plant-to-wholesaler lead time of 2 weeks 2. B) The plant shipment lot size of 500 and plant-to-wholesaler lead time of 3 weeks 3. C) The plant shipment lot size of 400 and plant-to-wholesaler lead time of 3 weeks 4. D) The plant shipment lot size of 600 and plant-to-wholesaler lead time of 4 weeks Answer: B 15) Refer to Scenario 9.2. Which of the following situations results in the wholesaler's total cycle plus pipeline inventories amounting to 400 units? 1. A) The plant shipment lot size of 500 and plant-to-wholesaler lead time of 3 weeks 2. B) The plant shipment lot size of 400 and plant-to-wholesaler lead time of 3 weeks 3. C) The plant shipment lot size of 600 and plant-to-wholesaler lead time of 4 weeks 4. D) The plant shipment lot size of 400 and plant-to-wholesaler lead time of 2 weeks Answer: D 16) ________ are inventories needed for the production of goods and services; they are considered to be the inputs to the transformation process. Answer: Raw materials 17) ________ consists of items such as components or assemblies needed for a final product in manufacturing. Answer: Work-in-process (WIP) 18) ________ inventory is the portion of total inventory that varies directly with lot size. Answer: Cycle 19) The ________ determines the frequency and quantity to order. Answer: lot size 20) ________ inventory is the surplus inventory that a company holds to protect against uncertainties in demand, leadtime, and supply. Answer: Safety stock 21) As safety stock increases, the holding cost of that inventory item ________. Answer: increases 22) ________ inventory is the inventory moving from point to point in the materials flow system. Answer: Pipeline 23) When considering dependent / independent demand, in the example of tires and automobiles, the original equipment tires represent ________-demand items, while automobiles represent a(n) ________-demand item. Answer: dependent, independent 9.4 ABC Analysis 1) 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. Answer: TRUE 2) A stock-keeping unit (SKU) is a specially designed container for holding a specific amount of an inventory item somewhere along the supply chain. Answer: FALSE 3) ABC analysis is a process for categorizing SKUs according to dollar usage so that managers can focus on items with the highest dollar value. Answer: TRUE 4) When using ABC analysis, class C SKUs should be reviewed frequently. Answer: FALSE 5) Cycle counting is an inventory-control method whereby storeroom personnel physically count a small percent of the total number of items each day. Answer: TRUE Table 9.1 Inventory records show the following: Series Unit Cost Count Q $1751.34 6 R $462.00 22 S $88.44 63 T $382.73 14 U $96.42 24 V $38.04 51 W $34.23 17 6) Use Table 9.1 to ascertain the veracity of this statement. Items in series U are the most C-like of all inventory SKUs. Answer: TRUE 7) What is generally TRUE about class A SKUs in ABC analysis? They represent about: 1. A) 20 percent of all SKUs. 2. B) 30 percent of all SKUs. 3. C) 20 percent of the dollar usage. 4. D) 50 percent of the dollar usage. Answer: A 8) What is generally TRUE about class A SKUs in ABC analysis? They represent about: 1. A) 50 percent of all SKUs. 2. B) 80 percent of all SKUs. 3. C) 20 percent of the dollar usage. 4. D) 80 percent of the dollar usage. Answer: D Table 9.1 Inventory records show the following: Series Unit Cost Count Q $1751.34 6 R $462.00 22 S $88.44 63 T $382.73 14 U $96.42 24 V $38.04 51 W $34.23 17 9) Use Table 9.1 to identify the best statement. 1. A) Items in series V and Q fall in the same category of an ABC analysis. 2. B) Items in series W and S fall in the same category of an ABC analysis. 3. C) Items in series W and Q fall in the same category of an ABC analysis. 4. D) Items in series S and V should be in the Class B of an ABC analysis. Answer: C 10) What is generally TRUE about class B SKUs in ABC analysis? They represent about: 1. A) 20 percent of all SKUs and about 80 percent of the dollar usage. 2. B) 80 percent of all SKUs and about 20 percent of the dollar usage. 3. C) 30 percent of all SKUs and about 15 percent of the dollar usage. 4. D) 50 percent of all SKUs and about 95 percent of the dollar usage. Answer: C 11) What is generally TRUE about class C SKUs in ABC analysis? They represent about: 1. A) 20 percent of all SKUs. 2. B) 50 percent of all SKUs. 3. C) 15 percent of the dollar usage. 4. D) 50 percent of the dollar usage. Answer: B 12) What is generally TRUE about class C SKUs in ABC analysis? They represent about: 1. A) 20 percent of all SKUs. 2. B) 30 percent of all SKUs. 3. C) 5 percent of the dollar usage. 4. D) 50 percent of the dollar usage. Answer: C 13) ABC analysis is closely related to: 1. A) three-bin analysis. 2. B) EOQ analysis. 3. C) repeatability analysis. 4. D) Pareto analysis. Answer: D 14) In ABC analysis, ________ SKUs represent the smallest number of SKUs but the greatest dollar usage. Answer: class A 15) In an ABC analysis, class ________ SKUs, which typically make up about ________ % of the SKUs, account for about 80% of the dollar usage. Answer: A, 20 16) In an ABC analysis, class ________ SKUs, which typically make up about ________ % of the SKUs, account for only about 15% of the dollar usage. Answer: B, 30 17) In an ABC analysis, class ________ SKUs, which typically make up ________ % of the SKUs, account for only about 5% of the dollar usage. Answer: C, 50 18) Inventory manager George Costanza knows too well that shrinkage occurs so he goes to the stock room every day to do a spot check of a few pre-selected items, physically counting them to verify that his count agrees with the number indicated by their computerized inventory system. This method of inventory control is known as ________. Answer: cycle counting 9.5 Economic Order Quantity 1) EOQ should be used if you use a make-to-order strategy and the customer specifies that the entire order be delivered in one shipment. Answer: FALSE 2) EOQ should be used if you follow a make-to-stock strategy and the item has relatively stable demand. Answer: TRUE 3) The EOQ is the smallest lot size that a supplier will allow a customer to order. Answer: FALSE 4) As the annual demand increases, the EOQ also increases. Answer: TRUE 5) Considering the EOQ model, smaller lots are justified when holding costs are decreased. Answer: FALSE 6) Considering the EOQ model, a reduction in ordering costs justifies reducing the lot size ordered. Answer: TRUE 7) Which one of the following is NOT an assumption of the EOQ model? 1. A) Decisions for one item can be made independently of decisions made for other items. 2. B) There is no uncertainty in lead-time. 3. 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. 4. D) Quantity discounts can be taken advantage of for large lot sizes. Answer: D 8) Which one of the following statements regarding the economic order quantity (EOQ) is TRUE? 1. A) The EOQ model combines several different item orders to the same supplier. 2. B) If an order quantity is larger than the EOQ, the annual holding cost for cycle inventory exceeds the annual ordering cost. 3. C) The EOQ model assumes a variable demand pattern. 4. D) When the interest rate drops, the inventory holding cost decreases and the EOQ decreases. Answer: B 9) Which one of the following statements concerning the economic order quantity (EOQ) model is TRUE? 1. A) An increase in holding cost will increase the EOQ. 2. B) A decrease in demand will increase the EOQ. 3. C) A decrease in holding cost will increase the EOQ. 4. D) None of the above is true. Answer: C 10) Which one of the following statements concerning the economic order quantity (EOQ) is TRUE? 1. A) The EOQ is the order quantity that minimizes annual inventory holding costs. 2. B) An increase in demand will increase the EOQ. 3. C) The time between orders (TBO) will increase with an increase in holding costs. 4. D) The EOQ formula assumes that there are only three relevant costs: holding, transportation, and setup. Answer: B 11) 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: 1. A) you followed a make-to-stock strategy for an item with stable demand. 2. B) your carrying costs and ordering costs are known and relatively stable. 3. C) the order size is constrained by capacity limitations such as the number or size of the delivery trucks. 4. D) your setup costs and holding costs remain constant and can be determined. Answer: C 12) 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? 1. A) Their order quantity will fall and so will the time between orders. 2. B) Their order quantity will fall but the time between orders will rise. 3. C) Their order quantity will rise but the time between orders will fall. 4. D) Their order quantity will rise and so will the time between orders. Answer: C 13) 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? 1. A) They will be reduced by a factor of 1.41. 2. B) They will not change. 3. C) They will be reduced by a factor of 2.00. 4. D) They will be increased by a factor of 1.41. Answer: B 14) The Lemming Company implements an aggressive marketing campaign and effectively doubles the annual demand for Model 13s. Their total annual holding cost should: 1. A) decrease by 50%. 2. B) increase by 100%. 3. C) stay the same. 4. D) increase by 40%. Answer: D 15) 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? 1. A) How critical are errors in estimating demand (D), inventory holding cost (H), and setup cost (S)? 2. B) What should happen to lot sizes if interest rates drop? 3. C) What should happen to cycle inventory if the demand rate increases? 4. D) What should happen to lot sizes if supply and lead-time uncertainty increase? Answer: D 16) 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? 1. A) less than or equal to $650 2. B) more than $650 and less than $1,050 3. C) more than $1,050 and less than $1,450 4. D) more than $1,450 Answer: D Scenario 9.3 The Talbot Company uses electrical assemblies to produce an array of small appliances. One of its high cost / high volume assemblies, the XO-01, has an estimated annual demand of 8,000 units. Talbot estimates the cost to place an order is $50, and the holding cost for each assembly is $20 per year. The company operates 250 days per year. 17) Use the information in Scenario 9.3. What is the economic order quantity for the XO-01? 1. A) less than or equal to 100 units 2. B) greater than 100 units but less than or equal to 180 units 3. C) greater than 180 units but less than or equal to 250 units 4. D) greater than 250 units 18) Use the information in Scenario 9.3. What is the annual inventory holding cost if Talbot orders using the EOQ quantity? 1. A) less than or equal to $1,500 2. B) greater than $1,500 but less than or equal to $4,000 3. C) greater than $4,000 but less than or equal to $6,500 4. D) greater than $6,500 Answer: B 19) Use the information in Scenario 9.3. What is the annual ordering cost if Talbot orders using the EOQ quantity? 1. A) less than or equal to $1,000 2. B) greater than $1,000 but less than or equal to $2,500 3. C) greater than $2,500 but less than or equal to $4,000 4. D) greater than $4,000 Answer: B 20) Use the information in Scenario 9.3. What is the total annual holding and ordering costs if Talbot orders using the EOQ quantity? 1. A) greater than $7,000 2. B) greater than $5,000 but less than or equal to $7,000 3. C) greater than $2,500 but less than or equal to $5,000 4. D) less than or equal to $2,500 Answer: C 21) Use the information in Scenario 9.3. What is the cycle length (time between orders) when orders are placed using the EOQ quantity? 1. A) less than 5 days 2. B) greater than 5 days but less than or equal to 10 days 3. C) greater than 10 days but less than or equal to 15 days 4. D) greater than 15 days Answer: B 22. Use the information in Scenario 9.3. How many times per year must Talbot order the XO-01 when orders are placed using the EOQ quantity? 1. A) less than 10 times per year 2. B) greater than 10 times but less than or equal to 20 times per year 3. C) greater than 20 times but less than or equal to 30 times per year 4. D) greater than 30 times per year Answer: D 23) Use the information in Scenario 9.3. The purchasing manager decides that, in order to save purchasing time, orders for the XO-01 will be placed every three months, or four times per year. How much does this approach cost Talbot in total annual holding and ordering costs (instead of Talbot ordering using the EOQ quantity)? 1. A) greater than $18,000 2. B) greater than $14,000 but less than or equal to $18,000 3. C) greater than $10,000 but less than or equal to $14,000 4. D) less than or equal to $10,000 Answer: B Scenario 9.4 The Mwongola Company is a small manufacturing company that uses gear assemblies to produce four different models of mountain bikes. One of these gear assemblies, the "Smooth Shifter", is used for the two most expensive of Burdell's four models, and has an estimated annual demand of 300 units. Burdell estimates the cost to place an order is $40, and the holding cost for each assembly is $60 per year. The company operates 250 days per year. 24) Use the information in Scenario 9.4. What is the economic order quantity for the Smooth Shifter? 1. A) less than or equal to 40 units 2. B) greater than 40 units but less than or equal to 80 units 3. C) greater than 80 units but less than or equal to 120 units 4. D) greater than 120 units Answer: A 25) Use the information in Scenario 9.4. What is the annual inventory holding cost if Mwongloa orders using the EOQ quantity? 1. A) less than or equal to $300 2. B) greater than $300 but less than or equal to $500 3. C) greater than $500 but less than or equal to $700 4. D) greater than $700 Answer: C 26) Use the information in Scenario 9.4. What is the annual ordering costs if Mwongola orders using the EOQ quantity? 1. A) less than or equal to $200 2. B) greater than $200 but less than or equal to $350 3. C) greater than $350 but less than or equal to $500 4. D) greater than $500 Answer: D 27) Use the information in Scenario 9.4. What is the total annual holding and ordering costs if Mwongola orders using the EOQ quantity? 1. A) greater than $1,500 2. B) greater than $1,000 but less than or equal to $1,500 3. C) greater than $750 but less than or equal to $1,000 4. D) less than or equal to $750 Answer: B 28) Use the information in Scenario 9.4. What is the cycle length (time between orders) when orders are placed using the EOQ quantity? 1. A) less than or equal to 5 days 2. B) greater than 5 days but less than or equal to 10 days 3. C) greater than 10 days but less than or equal to 15 days 4. D) greater than 15 days Answer: D 29) Use the information in Scenario 9.4. How many times per year must Mwongola order the Smooth Shifter when orders are placed using the EOQ quantity? 1. A) less than or equal to 10 times per year 2. B) more than 10 times but fewer than or equal to 20 times per year 3. C) more than 20 times but fewer than or equal to 30 times per year 4. D) more than 30 times per year Answer: B 30) Use the information in Scenario 9.4. The purchasing manager decides that, in order to save purchasing time, orders for the Smooth Shifter will be placed once a month, or twelve times per year. How much does this approach cost Mwongola in additional annual holding and ordering costs (instead of Mwongola ordering using the EOQ quantity)? 1. A) more than $500 2. B) more than $200 but less than or equal to $500 3. C) more than $50 but less than or equal to $200 4. D) less than or equal to $50 Answer: D Scenario 9.5 Tom Bergman, owner and operator of the Earplug Superstore, is reviewing the costs associated with the store's bestselling hearing aid, the BZ15. The data available to Dr. Bergman concerning this device follow. Demand = 25 units/week Order cost = $3/order Holding cost = $1.50/unit/year The Earplug Superstore operates 52 weeks a year. 31) Use the information in Scenario 9.5. If Tom decides to order at the economic order quantity, what is the sum of the annual ordering cost and holding cost? 1. A) less than or equal to $90 2. B) greater than $90 but less than or equal to $100 3. C) greater than $100 but less than or equal to $115 4. D) greater than $115 Answer: C 32) Use the information in Scenario 9.5. Tom cuts the ordering cost in half by implementing a streamlined processing system. How many fewer units should he now order each time he places an order? 1. A) less than or equal to 10 units 2. B) greater than 10 but less than or equal to 15 units 3. C) greater than 15 but less than or equal to 20 units 4. D) greater than 20 units Answer: D 33) Use the information in Scenario 9.5. If Tom orders a one-year supply at a time, how much higher are his total (ordering and holding) costs compared to total costs incurred if he ordered at his EOQ? 1. A) less than or equal to $600 2. B) greater than $600 but less than or equal to $700 3. C) greater than $700 but less than or equal to $800 4. D) greater than $800 Answer: D 34) Use the information in Scenario 9.5. If Tom orders at the economic order quantity, how many units does he order at a time? 1. A) less than or equal to 75 units 2. B) greater than 75 but less than or equal to 150 units 3. C) greater than 150 but less than or equal to 250 units 4. D) greater than 250 units Answer: A 35) Use the information in Scenario 9.5. If Tom orders such that his annual holding cost is twice what his annual ordering cost is, how many units at a time is he ordering? 1. A) less than or equal to 100 units 2. B) greater than 100 but less than or equal to 105 units 3. C) greater than 105 but less than or equal to 110 units 4. D) greater than 110 units Answer: B 36) 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 the selling price. If the store operates 52 weeks a year, what can you say about the current lot size of 235? 1. A) too large 2. B) too small 3. C) just right 4. D) cannot tell from the information given Answer: A 37) 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. 1. A) less than 1 week 2. B) greater than 1 week but less than or equal to 2 weeks 3. C) greater than 2 weeks but less than or equal to 3 weeks 4. D) greater than 3 weeks Answer: B Scenario 9.6 Consider the following data for an independent-demand item maintained by Angie Bonpensiero, the proprietor of a local auto repair shop: Weekly demand = 50 units Ordering cost = $8/order Holding cost = $4/unit/year Weeks in a year = 50 38) Use the information in Scenario 9.6. If Bonpensiero uses the EOQ model, how frequently must she place orders for this item? 1. A) every week 2. B) every 2 weeks 3. C) every 3 weeks 4. D) every 4 weeks Answer: B 39) Use the information in Scenario 9.6. Due to new ordering procedures initiated by Bonpensiero, the ordering cost is drops to $4 per order. At the same time, the weekly demand increases to 64 units per week due to an increase in business. What effect do these changes have on the EOQ quantity for this item? 1. A) The EOQ quantity remains unchanged. 2. B) The EOQ quantity increases by 20%. 3. C) The EOQ quantity decreases by 20%. 4. D) Sufficient information is not available to answering this question. Answer: C Scenario 9.7 Cranium, Inc., purchases term papers from an overseas supplier under a continuous review system. The average demand for a popular mode is 300 units a day with a standard deviation of 30 units a day. It costs $60 to process each order and there is a five-day lead-time. The holding cost for a paper is $0.25 per year and the company policy is to maintain a 98% service level. Cranium operates 200 days per year. A normal distribution table is appended to this exam. 40) Use the information in Scenario 9.7. What is the EOQ for these papers? 1. A) less than or equal to 3,000 units 2. B) greater than 3,000 units but less than or equal to 4,000 units 3. C) greater than 4,000 units but less than or equal to 5,000 units 4. D) greater than 5,000 units Answer: D Scenario 9.8 A company operating under a continuous review system has an average demand of 50 units per week for the item it produces. The standard deviation in weekly demand is 20 units. The lead-time for the item is six weeks, and it costs the company $30 to process each order. The holding cost for each unit is $10 per year. The company operates 52 weeks per year. A normal distribution table is appended to this exam. 41) Use the information in Scenario 9.8. What is the economic order quantity (EOQ) for this item? 1. A) less than or equal to 175 units 2. B) greater than 175 units but less than or equal to 200 units 3. C) greater than 200 units but less than or equal to 225 units 4. D) greater than 225 units Answer: A Scenario 9.9 "Gollee those cats sure go through a lot of food," Geoff exclaimed as he saw the shopping list pad that had been preprinted with the words "cat food" a the top. He pondered a different approach to shopping for the furry little darlings, reviewed his shopping records, and discovered the following. The price of cat food has held steady at 89 cents per can. Despite feigning indifference, each of the seven cats nibbles their way through an average of one can per day, three hundred sixty five days a year. The price of gasoline has held constant at $3.50 per gallon and his pickup uses a gallon each way to the cat food store. The cost to hold a can of cat food is 10% of the unit price. 42) Using the information in Scenario 9.9 determine the economic order quantity for cat food. 1. A) 634 cans 2. B) 448 cans 3. C) 239 cans 4. D) 169 cans Answer: A 43) Use the information in Scenario 9.9 to determine the average number of orders per year if Geoff adopts an EOQ policy. 1. A) 3 orders per year 2. B) 4 orders per year 3. C) five orders per year 4. D) six orders per year Answer: B 44) Use the information in Scenario 9.9 to determine the annual setup cost if Geoff follows an EOQ policy to obtain cat food. 1. A) $112 2. B) $14 3. C) $28 4. D) $56 Answer: C 45) Use the information in Scenario 9.9 to determine the combined cost of goods and inventory policy if Geoff decides to follow the economic order quantity model? 1. A) $2415 2. B) $2218 3. C) $2274 4. D) $2330 Answer: D 46) Use the information in Scenario 9.9 to determine the amount of time in-between trips to the cat food store if Geoff wisely elects to follow an EOQ policy for obtaining cat food. 1. A) about three months 2. B) about three weeks 3. C) about six months 4. D) about three days 47) Use the information in Scenario 9.9 to determine the average pantry space occupied by cat food if each can takes up 13 cubic inches and Geoff obeys an EOQ policy for managing the cat food purchase process. 2. A) 2.4 cubic feet 3. B) 24 cubic feet 4. C) 4.8 cubic feet 5. D) 12 cubic feet 48) The number of setups (or orders) per year is determined by the annual demand and order quantity. 49) The __lot size______ determines the frequency and quantity to order. 50) A quantity discount is an incentive to order larger quantities, where the price per unit decreases when the order is sufficiently large. 51) If an item is ordered using an EOQ policy, as the annual demand for an item decreases, the EOQ for the item decreases 52) In an EOQ model, as the annual demand for an item increases, the EOQ for the item increases 53) In an EOQ model, as the ordering cost for an item decreases, the EOQ for the item decreases 54) In an EOQ model, as the annual holding cost for an item increases, the EOQ for the item ________. Answer: decreases 55) The ________ is the average elapsed time between receiving replenishment orders of Q units for a particular lot size. Answer: TBO, time between orders