Chapter 12 Inventory Management Answers Part 1

Operations Management Chapter 12 Inventory Management 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. Answer: FALSE Diff: 1 Topic: Global company profile Objective: no LO 2) A major challenge in inventory management is to maintain a balance between inventory investment and customer service. Answer: TRUE Diff: 1 Topic: The importance of inventory Objective: no LO 3) Which item to order and with which supplier the order should be placed are the two fundamental issues in inventory management. Answer: FALSE Diff: 2 Topic: The importance of inventory Objective: no LO 4) One function of inventory is to take advantage of quantity discounts. Answer: TRUE Diff: 1 Topic: Functions of inventory Objective: no LO 5) Work-in-process inventory is devoted to maintenance, repair, and operations. Answer: FALSE Diff: 1 Topic: Functions of inventory Objective: no LO 6) ABC analysis classifies inventoried items into three groups, usually based on annual units or quantities used. Answer: FALSE Diff: 1 Topic: Managing inventory Objective: LO12-1 7) In ABC analysis, "A" Items are the most tightly controlled. Answer: TRUE Diff: 2 Topic: Managing inventory Objective: LO12-1 1 8) ABC analysis is based on the presumption that carefully controlling all items is necessary to produce important inventory savings. Answer: FALSE Diff: 1 Topic: Managing inventory Objective: LO12-1 9) Cycle counting is an inventory control technique exclusively used for cyclical items. Answer: FALSE Diff: 2 Topic: Managing inventory Objective: LO12-2 10) One advantage of cycle counting is that it maintains accurate inventory records. Answer: TRUE Diff: 2 Topic: Managing inventory Objective: LO12-2 11) In cycle counting, the frequency of item counting and stock verification usually varies from item to item depending upon the item's classification. Answer: TRUE Diff: 2 Topic: Managing inventory Objective: LO12-2 12) Retail inventory that is unaccounted for between receipt and time of sale is known as shrinkage. Answer: TRUE Diff: 2 Topic: Managing inventory Objective: no LO 13) The demand for automobiles would be considered an independent demand. Answer: TRUE Diff: 2 Topic: Inventory models Objective: no LO 14) Insurance and taxes on inventory are part of the costs known as setup or ordering costs. Answer: FALSE Diff: 1 Topic: Inventory models Objective: no LO 15) If setup costs are reduced by substantial reductions in setup time, the production order quantity is also reduced. Answer: TRUE Diff: 1 Topic: Inventory models, and Inventory models for independent demand Objective: LO12-5 2 16) The EOQ model is best suited for items whose demand is dependent on other products. Answer: FALSE Diff: 2 Topic: Inventory models for independent demand Objective: LO12-3 17) In the simple EOQ model, if annual demand were to increase, the EOQ would increase proportionately. Answer: FALSE Diff: 2 Topic: Inventory models for independent demand Objective: LO12-3 18) At the economic order quantity, holding costs are equal to product costs. Answer: FALSE Diff: 2 Topic: Inventory models for independent demand Objective: LO12-3 19) In the simple EOQ model, if the carrying cost were to double, the EOQ would also double. Answer: FALSE Diff: 2 Topic: Inventory models for independent demand Objective: LO12-3 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. Answer: TRUE Diff: 2 Topic: Inventory models for independent demand Objective: LO12-5 21) The reorder point is the inventory level at which action is taken to replenish the stocked item. Answer: TRUE Diff: 2 Topic: Inventory models for independent demand Objective: LO12-4 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. Answer: TRUE Diff: 2 Topic: Inventory models for independent demand Objective: LO12-6 23) In the quantity discount model, the cost of acquiring goods (product cost) is not a factor in determining lot size. Answer: FALSE Diff: 1 Topic: Inventory models for independent demand Objective: LO12-6 3 24) Service level is the complement of the probability of a stockout. Answer: TRUE Diff: 2 Topic: Probabilistic models and safety stock Objective: LO12-7 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. Answer: TRUE Diff: 1 Topic: Probabilistic models and safety stock Objective: LO12-4, LO12-7 26) Safety stock in inventory systems depends only on the average demand during the lead time. Answer: FALSE Diff: 2 Topic: Probabilistic models and safety stock Objective: LO12-4, LO12-7 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. Answer: TRUE Diff: 1 Topic: Inventory models for independent demand Objective: LO12-4 28) Which of the following statements regarding Amazon.com is false? A) The company was opened by Jeff Bezos in 1995. B) The company was founded as, and still is, a "virtual retailer" with no inventory. C) The company is now a world-class leader in warehouse management and automation. D) The company uses both United Parcel Service and the U.S. Postal Service as shippers. E) Amazon obtains its competitive advantage through inventory management. Answer: B Diff: 2 Topic: Global company profile Objective: no LO 29) Which of the following is a function of inventory? A) to decouple or separate parts of the production process B) to decouple the firm from fluctuations in demand and provide a stock of goods that will provide a selection for customers C) to take advantage of quantity discounts D) to hedge against inflation E) All of the above are functions of inventory. Answer: E Diff: 2 Topic: Functions of inventory Objective: no LO 4 30) Which of the following would not generally be a motive for a firm to hold inventories? A) to decouple or separate parts of the production process B) to provide a stock of goods that will provide a selection for customers C) to take advantage of quantity discounts D) to minimize holding costs E) All of the above are functions of inventory. Answer: D Diff: 2 Topic: Functions of inventory Objective: no LO 31) Which of the following is not one of the four main types of inventory? A) raw material inventory B) work-in-process inventory C) maintenance/repair/operating supply inventory D) safety stock inventory E) All of these are main types of inventory. Answer: D Diff: 2 Topic: Functions of inventory Objective: no LO 32) Which of the following statements about ABC analysis is false ? A) ABC analysis is based on the presumption that controlling the few most important items produces the vast majority of inventory savings. B) In ABC analysis, "A" Items are tightly controlled, have accurate records, and receive regular review by major decision makers. C) In ABC analysis, "C" Items have minimal records, periodic review, and simple controls. D) ABC analysis is based on the presumption that all items must be tightly controlled to produce important cost savings. E) All of the above statements are true. Answer: D Diff: 2 Topic: Managing inventory Objective: LO12-1 33) All of the following statements about ABC analysis are true except A) inventory may be categorized by measures other than dollar volume B) it categorizes on-hand inventory into three groups based on annual dollar volume C) it is an application of the Pareto principle D) it states that all items require the same degree of control E) it states that there are the critical few and the trivial many inventory items Answer: D Diff: 2 Topic: Managing inventory Objective: LO12-1 5 34) ABC analysis is based upon the principle that A) all items in inventory must be monitored very closely B) there are usually a few critical items, and many items which are less critical C) an item is critical if its usage is high D) more time should be spent on class "C" items because there are more of them E) an item is critical if its unit price is high Answer: B Diff: 2 Topic: Managing inventory Objective: LO12-1 35) ABC analysis divides on-hand inventory into three classes, generally based upon A) item quality B) unit price C) the number of units on hand D) annual demand E) annual dollar volume Answer: E Diff: 2 Topic: Managing inventory Objective: LO12-1 36) Cycle counting A) is a process by which inventory records are verified once a year B) provides a measure of inventory accuracy C) provides a measure of inventory turnover D) assumes that all inventory records must be verified with the same frequency E) assumes that the most frequently used items must be counted more frequently Answer: B Diff: 2 Topic: Managing inventory Objective: LO12-2 37) Which of the following statements regarding control of service inventories is true? A) Service inventory is a fictional concept, because services are intangible. B) Service inventory needs no safety stock, because there's no such thing as a service stockout. C) Effective control of all goods leaving the facility is one applicable technique. D) Service inventory has carrying costs but not setup costs. E) All of the above are true. Answer: C Diff: 2 Topic: Managing inventory Objective: no LO 6 38) The two most basic inventory questions answered by the typical inventory model are A) timing and cost of orders B) quantity and cost of orders C) timing and quantity of orders D) order quantity and service level E) ordering cost and carrying cost Answer: C Diff: 2 Topic: Inventory models for independent demand Objective: no LO 39) Among the advantages of cycle counting is that it A) makes the annual physical inventory more acceptable to management B) does not require the detailed records necessary when annual physical inventory is used C) does not require highly trained people D) allows more rapid identification of errors and consequent remedial action than is possible with annual physical inventory E) does not need to be performed for less expensive items Answer: D Diff: 2 Topic: Managing inventory Objective: LO12-2 40) Which of the following are elements of inventory holding costs? A) housing costs B) material handling costs C) investment costs D) pilferage, scrap, and obsolescence E) All of the above are elements of inventory holding cost. Answer: E Diff: 2 Topic: Inventory models Objective: LO12-3 41) Which of the following is not an assumption of the economic order quantity model shown below? Q* = 2D S H A) Demand is known, constant, and independent. B) Lead time is known and constant. C) Quantity discounts are not possible. D) Production and use can occur simultaneously. E) The only variable costs are setup cost and holding (or carrying) cost. Answer: D Diff: 2 Topic: Inventory models for independent demand Objective: LO12-3 7 42) The primary purpose of the basic economic order quantity model shown below is Q* = 2D S H A) to calculate the reorder point, so that replenishments take place at the proper time B) to minimize the sum of carrying cost and holding cost C) to maximize the customer service level D) to minimize the sum of setup cost and holding cost E) to calculate the optimum safety stock Answer: D Diff: 2 Topic: Inventory models for independent demand Objective: LO12-3 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 Q* = 2D S H A) is smaller than the holding cost per unit B) is zero C) is one-half of the economic order quantity D) is affected by the amount of product cost E) All of the above are true. Answer: C Diff: 3 Topic: Inventory models for independent demand Objective: LO12-3 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? A) 16 B) 70 C) 110 D) 183 E) 600 Answer: C Diff: 2 Topic: Inventory models for independent demand AACSB: Analytic Skills Objective: LO12-3 8 45) Most inventory models attempt to minimize A) the likelihood of a stockout B) the number of items ordered C) total inventory based costs D) the number of orders placed E) the safety stock Answer: C Diff: 1 Topic: Inventory models for independent demand Objective: LO12-3 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% B) increase by 100% C) increase by 200% D) increase, but more data is needed to say by how much E) either increase or decrease Answer: A Diff: 2 Topic: Inventory models for independent demand AACSB: Analytic Skills Objective: LO12-3 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 A) 24 B) 100 C) 141 D) 490 E) 600 Answer: C Diff: 2 Topic: Inventory models for independent demand AACSB: Analytic Skills Objective: LO12-3 48) Which of the following statements about the basic EOQ model is true? A) If the ordering cost were to double, the EOQ would rise. B) If annual demand were to double, the EOQ would increase. C) If the carrying cost were to increase, the EOQ would fall. D) If annual demand were to double, the number of orders per year would increase. E) All of the above statements are true. Answer: E Diff: 3 Topic: Inventory models for independent demand Objective: LO12-3 9 49) Which of the following statements about the basic EOQ model is false? A) If the setup cost were to decrease, the EOQ would fall. B) If annual demand were to increase, the EOQ would increase. C) If the ordering cost were to increase, the EOQ would rise. D) If annual demand were to double, the EOQ would also double. E) All of the above statements are true. Answer: D Diff: 2 Topic: Inventory models for independent demand Objective: LO12-3 50) A product whose EOQ is 40 experiences a decrease in ordering cost from $90 per order to $10. The revised EOQ is A) three times as large B) one-third as large C) nine times as large D) one-ninth as large E) cannot be determined Answer: B Diff: 3 Topic: Inventory models for independent demand AACSB: Analytic Skills Objective: LO12-3 51) A product whose EOQ is 400 experiences a 50% increase in demand. The new EOQ is A) unchanged B) increased by less than 50% C) increased by 50% D) increased by more than 50% E) cannot be determined Answer: B Diff: 3 Topic: Inventory models for independent demand AACSB: Analytic Skills Objective: LO12-3 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 A) $1.50 B) $2.00 C) $3.00 D) $150.00 E) not enough data to determine Answer: C Diff: 3 Topic: Inventory models for independent demand AACSB: Analytic Skills Objective: LO12-3 10