CH12-Inventory Management Policies

File: ch12, Chapter 12: Inventory Management Policies
Multiple Choice
1. What does WIP stand for?

a) work-in-process
b) waiting inventory position
c) warning of inventory position
d) weight of inventory position
e) waiting inventory potential
Ans: a
Section Ref: How Companies Use Their Inventory
Level: easy
2. What are purchased items or extracted materials that will be transformed into components or
products called?
a) work-in-process inventory
b) finished goods inventory
c) raw materials inventory
d) distribution inventory
e) MRO inventory
Ans: c
Section Ref: Types of Inventory
Level: easy
3. Hand tools, lubricants, and cleaning supplies are usually examples of what?
a) WIP inventory
b) finished goods inventory
e) MRO inventory
Ans: e
Level: moderate
4. Finished goods in transit to the customer are called what?

a) WIP inventory
b) components inventory
e) MRO inventory
Ans: d
Level: easy
5. Which inventory function specifically is designed to allow the company to maintain a level
production strategy?
a) anticipation inventory
b) fluctuation inventory
c) lot-size inventory
d) transportation inventory
e) speculative inventory
Ans: a
Level: moderate
6. Which inventory function provides a cushion against unexpected supply shortage?

Ans: e
Level: easy
7. Which inventory function helps firms garner quantity discounts?

Ans: c
Level: easy
8. Which of the following inventory functions does not involve end products sold to customers?
d) MRO inventory
Ans: d
Level: moderate
9. Which is the primary inventory function that is activated after coupons are distributed to
customers?
d) MRO inventory
Ans: a
Level: moderate
10. Which inventory function provides a hedge against inflation?

d) MRO inventory
Ans: e
Level: moderate
11. Which inventory function exists between the manufacturing plant and the distribution plant?
Ans: d
Level: moderate
12. Which of the following allow you to calculate the average amount of inventory in transit?
a) ATI (365*d)/t
b) ATI (t/365)*d
c) ATI = 365*t*d
d) ATI = (tD)/365
e) ATI (365*t)/d
Ans: e
Level: moderate
13. In inventory management, when discussing customer service we mean:

a) whether the customer is available when the product is.
b) whether the product is available regardless if the customer desires it or not.
c) whether the product is available when the customer wants it.
d) whether the customer wants the available product.
e) whether repair of the product is available.
Ans: c
Section Ref: Objectives of Inventory Management
Difficulty: easy
14. Percentage of orders shipped on schedule is a good measure of finished goods customer
service if:
a) all orders and customers have similar cost impacts.
b) all orders and customers have similar value.
c) all orders and customers have similar backorder requirements.
d) later deliveries are not considered.
e) late deliveries contribute to the overall demand.
Ans: b
Difficulty: hard
15. Percentage of Line Items Shipped on Schedule recognizes that:

a) not all orders are equal but fails to take into account the dollar value of orders.
b) not all orders are equal but this can be compensated for.
c) their are differences in orders in terms of both line items and dollar value.
d) an absolute measure of manufacturing or service time lost because material or parts are not
available.
e) all orders and customers should be treated equally.
Ans: a
Difficulty: medium
16. What is the formula for inventory turnover?
a) annual cost of goods sold / average inventory in dollars
b) annual sales / average inventory in dollars
c) average inventory in dollars / annual cost of goods sold
d) average inventory in dollars / annual sales
e) annual cost of goods sold / annual holding cost
Ans: a
Level: easy
17. Companies can achieve cost-efficient operations by using which of the following inventory
ways?
a) work-in-process to buffer operations
b) inventory building to leverage reduced setup costs
c) JIT inventory to reduce overall cost
d) level work force maintenance through
e) speculative selling
Ans: b
Level: moderate
17. If a company carries 13 weeks of supply, what is the inventory turnover?

a) 0.077
b) 4
c) 7.77
d) 676
e) 0.25
Ans: b
Level: moderate
18. The formula to calculate a weeks of supply is?

a) weeks of supply = average weekly usage in dollars/average inventory on hand in dollars
b) weeks of supply = average weekly usage/12 * average inventory on hand in dollars
c) weeks of supply = average inventory on hand in dollars/average weekly usage in dollars
d) weeks of supply = average inventory on hand * average weekly usage in dollars
e) weeks of supply average inventory on hand * average annual usage in dollars * 12
Ans: c
Section Ref: Relevant Inventory Costs
Level: hard
19. Which of the following is not affected by decisions about how much inventory to hold?
a) item costs
b) holding costs
c) depreciation
d) ordering costs
e) stockout costs
Ans: c
Level: moderate
20. All of the following affect holding costs except:

a) storage costs
b) obsolescence cost
c) damage cost
d) setup cost
e) insurance cost
Ans: d
Level: moderate
21. If inventory records fail to accurately reflect the quantity of materials available, all except
which of the following may occur?
a) poor customer service
b) continuous operations
c) lower productivity
d) poor material planning
e) excessive expediting
Ans: b
Section Ref: Inventory Record Accuracy
Level: easy
22. In the service industry it is considered good performance when a company has an inventory
loss of only:
a) 1%
b) 2%
c) 3%
d) 4%
e) 5%
Ans: a
Section Ref: Inventory in Service Organizations
Level: moderate
23. A SKU is a ______ at a _____ ______geographic location.

a) cost, uniquely identified
b) profit, generally classified
c) specific item, generally classified
d) specific item, particular
e) general item, particular
Ans: d
Section Ref: Determining Order quantities
Level: moderate
24. In a periodic review inventory system, how many units are ordered?
a) Target inventory level
b) Target inventory level on hand balance
c) Max inventory level min inventory level
d) The EOQ
e) Average demand during review period + average demand during lead time
Ans: b
Section Ref: Periodic Review System
Level: moderate
25. Which of the following is an assumption of the basic EOQ model?

a) Lead time is unknown.
b) Demand may be seasonal.
c) Orders can arrive in partial shipments.
d) Quantity discounts are not considered.
e) Lost sales are allowed, but not back orders.
Ans: d
Section Ref: Mathematical Models for Determining Order Quantity
Level: moderate

a) Lead time is known and constant.
d) Quantity discounts are considered.
Ans: a
Level: moderate

b) Demand is known and constant.
Ans: b
Level: moderate

c) Orders arrive at once (in one lot).
Ans: c
Level: moderate
29. What costs are considered in the basic EOQ model?

a) annual ordering costs + annual holding costs
b) annual purchasing costs + annual holding costs
c) annual ordering costs + annual holding costs + annual shortage costs
d) annual purchasing costs + annual ordering costs + annual holding costs + annual shortage
costs
e) ordering costs per order + annual holding costs
Answer: a
Level: easy
30. If annual demand is 24,000 units, orders are placed every 0.5 months, and the cost to place an
order is $50, what is the annual ordering cost?
a) $50
b) $1,200,000
c) $2,400,000
d) $1,200
e) $600,000
Ans: d
Level: moderate
31. If annual demand is 48,000 units, orders are placed in quantities of 2000 units at a time, and
the cost to place an order is $80, what is the annual ordering cost?
a) $1,920
b) $3,840,000
c) $160,000
d) $80
e) $4,160
Ans: a
Level: moderate
32. For the basic EOQ model, what is the formula for the total annual cost?
a) 2 DS H
b) (D/Q)S + (Q/2)H
c) (Q/D)S + (Q/2)H
d) DQ/S + 2Q/H
e) 2 DH S
Ans: b
Level: moderate
33. For the basic EOQ model, how many units should be ordered each time that an order is
placed?
a) 2 DS H
b) (D/Q)S + (Q/2)H
c) (Q/D)S + (Q/2)H
d) DQ/S + 2Q/H
e) 2 DH S
Ans: a
Level: moderate
34. If the EOQ is ordered, which of the following is true?
a) Annual ordering cost exceeds annual holding cost.
b) Annual holding cost exceeds annual ordering cost.
c) Annual ordering cost is equal to annual holding cost.
d) The sum of annual ordering cost plus annual holding cost is maximized.
e) The annual holding cost curve is decreasing.
Ans: c
Level: moderate
35. If the EOQ is ordered, which of the following represents the total annual cost of ordering and
holding?
a) 2 DS H
b) 2 DH S
c) 2 DSH
d) DSH
e) 2 H SD
Ans: c
Level: hard
36. What does EPQ stand for?

a) ensuring purchasing quality
b) economic production quota
c) economic production quantity
d) economic purchasing quota
e) economic purchasing quantity
Ans: c
Level: easy
37. Which basic EOQ assumption does the EPQ model relax?
a) Lead time is known and constant.
b) Demand is known and constant.
c) Quantity discounts are not considered.
d) Orders arrive at once.
e) Back orders are not allowed.
Ans: d
Level: moderate
38. If the costs (S and H) and demands (D) are the same, which of the following is not true with
regard to the EPQ model as compared to the EOQ model?
a) The EPQ model produces a lower total annual cost.
b) The maximum inventory level is lower under the EPQ model than under the EOQ model.
c) Both models use the same formula to compute annual ordering cost.
d) The inventory depletion rate is the same for both models.
e) Both models use the same formula to compute annual holding cost.
Ans: e
Level: hard
a) The EPQ model produces a higher total annual cost.
e) The two models use different formulas to compute annual holding cost.
Ans: a
Level: hard
c) The two models use different formulas to compute annual ordering cost.
Ans: c
Level: hard
d) The inventory depletion rate is not the same for both models.
Ans: d
Level: hard
42. If the costs (S and H) and demands (D) are the same, which of the following is true with
a) The lot size under the EPQ model is bigger than under the EOQ model.
b) The maximum inventory level is higher under the EPQ model than under the EOQ model.
c) The two models use different formulas to compute annual ordering cost.
d) The inventory depletion rate is not the same for both models.
e) Both models use the same formula to compute annual holding cost.
Ans: a
Level: hard
43. A (an) _________________ inventory record provides an up-to-date inventory balance by

recording all inventory transactions as they happen.
a) infinite
b) everlasting
c) constant
d) permanent
e) perpetual
Ans: e
Response: See page 437
Level: easy
44. In a two-bin system, what does the quantity in the second bin represent?
a) the EOQ
b) the EPQ
c) demand during replenishment lead time
d) the quantity in the first bin
e) safety stock
Ans: c
Level: moderate
45. Which of the following statements is not true?

a) A two-bin system allows a firm to not have to keep perpetual inventory records.
b) Using perpetual inventory records results in different order quantities than using a two-bin
system.
c) In a two-bin system, units in the second bin are not used until the first bin is empty.
d) In a two-bin system, the size of the second bin should equal the demand during replenishment
lead time.
e) Perpetual inventory records are appropriate when using the EPQ model.
Ans: b
Level: moderate
46. What costs are considered in the quantity discount model?

a) annual ordering costs + annual holding costs
b) annual purchasing costs + annual holding costs + annual ordering costs
c) annual ordering costs + annual holding costs + annual shortage costs
d. annual purchasing costs + annual ordering costs + annual holding costs + annual shortage
costs
e. ordering costs per order + annual holding costs
Ans: b
Level: easy
47. How can the EPQ model be economically reconciled with just-in-time (JIT) production?
a) Reduce annual demand (D).
b) Increase annual holding cost per unit (H).
c) Decrease ordering cost (S).
d) b and c
e) The two cannot be reconciled.
Ans: c
Level: moderate
48. _____________________ is the probability that demand during lead time will not exceed on-
hand inventory.
a) EOQ service level
b) Fill rate
c) Stockout risk
d) Order-cycle service level
e) Lead time service level
Ans: d
Section Ref: Determining Safety Stock Levels
Level: easy
49. The formula for calculating safety stock when an estimate of demand during lead time and its
standard deviation are known is?
a) SS = lead time * standard deviation
b) SS = lead time * z
c) SS = z* standard deviation
d) SS = z*dl
e) SS = dl* mean
Ans: d
Section Ref: Determining Safety Stock
Level: moderate
50. Which of the following is used in determining the order quantity in the periodic review
system?
a) reorder point
b) critical ratio
c) target inventory level
d) EOQ
e) EPQ
Ans: c
Level: easy
51. Under a periodic review system, enough inventory must be carried to protect against stockout
for the ______.
a) replenishment lead time
b) review period
c) replenishment lead time plus the review period
d) bottleneck cycle time
e) bottleneck cycle time plus the replenishment lead time
Ans: c
Level: moderate
52. What are the two major decisions to be made when using the periodic review system?
a) the time between orders and the target inventory level
b) the time between orders and the on-hand inventory
c) the target inventory level and the on-hand inventory
d) the time between orders and the order quantity
e) the target inventory level and the order quantity
Ans: a
Level: hard
53. What are two logical ways in which to base the time between orders in a periodic review
system?
a) replenishment lead time or EOQ calculations
b) replenishment lead time or bottleneck cycle time
c) convenience or replenishment lead time
d) convenience or EOQ calculations
e) convenience or bottleneck cycle time
Ans: d
Level: moderate
54. What does TBO stand for?

a) time-based optimization
b) target-based ordering
c) target-based optimization
d) time-based ordering
e) time between orders
Ans: e
Level: moderate
55. In a periodic review system, if you are basing your time between orders on the EOQ, what
should be its length in weeks?
a) EOQ / 52
b) EOQ / average weekly demand
c) average weekly demand / EOQ
d) 52 / EOQ
e) (EOQ)(average weekly demand)
Ans: b
Level: moderate
56. Consider a periodic review inventory system with a lead time of two weeks and a review
period of seven weeks. If the standard deviation of weekly demand is 200 and the desired cycle-
service level is 86%, what should the safety stock equal?
a) 305
b) 516
c) 600
d) 648
e) 1944
Ans: d
Level: moderate
57. Consider a periodic review system with a lead time of two weeks and a review period of
seven weeks. If the average demand per week is 1000 units and 300 units of safety stock are
held, what should the target inventory level be?
a) 7300
b) 1300
c) 9000
d) 9300
e) 3300
Ans: d
Level: moderate
58. Consider a periodic review system. The target inventory level is 1000 units. It is time to
review the item, and the on-hand inventory level is 200 units. How many units should be
ordered?
a) 800
b) 1000
c) 1200
d) the EOQ amount
e) the safety stock amount
Ans: a
Level: moderate
59. What implies that about 20% of the inventory items will account for about 80% of the
inventory value?
a) Littles law
b) Friedmans law
c) Pablos proposition
d) Keynes law
e) Paretos law
Ans: e
Section Ref: ABC Inventory Classification
Level: easy
60. The ranking in ABC inventory analysis is based on what?

a) annual dollar usage
b) annual demand in units
c) alphabetical order
d) unit price
e) item number
Ans: a
Level: easy
61. ABC inventory assumes that a companys inventory is ____ equal and _______________ the
same level of ____.
a) fully, does demand approximately, costs
b) counted, requires control for, profit
c) not, does not need, control
d) not, does not need, ordering
e) not, does not need, sales
Ans: c
Level: easy
62. Which of the following statements is true?

a) Periodic counting and cycle counting generally both count every item in stock.
b) Periodic counting and cycle counting generally both do not count every item in stock.
c) Periodic counting generally counts every item in stock, whereas annually cycle counting
generally does not daily.
d) Cycle counting generally counts every item in stock, whereas periodic counting generally does
not.
e) Periodic counting generally occurs more frequently than cycle counting.
Ans: c
Level: moderate
63. Suppose that a plant manager uses economic batch sizes for production of a product.
Suppose further that the setup cost is $50 per batch, the holding cost per unit per year is $10, the
annual demand is 30,000 units, the firm operates (and experiences demand) 300 days per year,
and the production rate per day is 1000 units. What will be the maximum inventory level that
this product ever reaches?
a) 577
b) 30
c) 519
d) 27,000
e) 58
Ans: c
Level: moderate
64. For product V, a firm has an annual holding cost percentage of 25%, an ordering cost of $70
per order, and annual demand of 1000 units. If they order less than 120 units at a time, the
purchase price is $40.00. If they order between 120 and 149 units at a time, the purchase price
for all units is $35.00. If they order at least 150 units, then the purchase price for all units is only
$30.00. How much should the firm order at one time?
a) 150
b) 120
c) 119
d) 126
e) 136
Ans: a
Level: moderate
65. For product W, a firm has an annual holding cost percentage of 20%, an ordering cost of
$110 per order, and annual demand of 15,000 units. The following price schedule applies to the
firms purchases.
Units Ordered Price Per Unit

1-250 $30.00
251-500 $28.00
501-750 $26.00
751 $25.00
What is the optimal order quantity?

a) 251
b) 501
c) 696
d) 751
e) 812
Ans: e
Level: moderate
66. Consider a continuous review inventory system with a lead time of two weeks. If the
standard deviation of demand during lead time is 212.132 and the desired order-cycle service
level is 86%, what should the safety stock equal?
a) 115
b) 229
c) 182
d) 171
e) 458
Ans: b
Level: moderate
67. A company that makes door knobs has found that the demand for its base model is fairly
constant at the rate of 60,000 units per year. Each model of door knob is made using the same
equipment, and it costs $120 in lost production and scrap every time that a change is made from
producing one model of door knob to another. The cost of materials and labor in each door knob
is $10, and the inventory holding cost is 40% of the per-unit cost per year. If the base model
door knobs are produced at the rate of 800 per day, how many should be produced in each
production run based on 300 working days per year?
a) 2683
b) 2191
c) 3098
d) 3394
e) 5367
Ans: b
Level: moderate
68. How can both the JIT and EOQ inventory theories effectively be reconciled?
a) They cant. A firm must choose either one or the other.
b) by using MRP
c) by considering the setup cost as a variable instead of a parameter
d) by applying Kanban cards to the EOQ system
e) by assuming a finite production rate
Ans: c
Section Ref: Justifying Smaller Order Quantities
Level: moderate
69. Consider the following all-units quantity discount schedule and calculated EOQs.
Units Ordered Price Per Unit EOQ at that Price

0-999 $36.00 1200
1,000-1,999 $32.00 1450
2,000-4,999 $30.00 2500
5,000-8,000 $26.00 2780
8,000 $20.00 6000
Which of the following sets of order quantities is guaranteed to contain the optimal solution?
a) {1450, 2500}
b) {1450, 999}
c) {0, 1000, 2000, 5000, 8000}
d) {1200, 1450, 2500, 2780, 6000}
e) {2500, 5000, 8000}
Ans: e
Level: moderate
70. Consider a firm with a daily demand of 100 units, a production rate per day of 500 units, a
setup cost of $200, and an annual holding cost per unit of $10. Suppose that the firm operates
300 days per year. How many units of inventory must their storage area be able to hold?
a) 1095
b) 1225
c) 876
d) 1081
e) 980
Ans: e
Level: hard
71. When is the basic EOQ model a special case of the EPQ model?
a) The demand per day approaches the demand per year.
b) The production rate per day approaches 0.
c) The production rate per day approaches infinity.
d) The back order cost approaches infinity.
e) d/p = 1.
Ans: c
Section Ref: Inventory Management Across the Organization
Level: hard
72. Consider the basic EOQ model. If annual demand doubles, what happens to the total annual
setup and holding cost?
a) It doubles.
b) It increases by 41.42%.
c) It remains the same.
d) The impact depends upon the value of the setup cost.
e) It quadruples (increases by 400%).
Ans: b
Level: hard
73. Which of the following is not an identified reason why manufacturing firms do not use
optimal EOQ order quantities?
a) do not have known uniform demand
b) some suppliers have a minimum order quantity
c) how the material is shipped
d) what the sales price is
e) insufficient storage space
Ans: d
Section Ref: Why Companies Dont Always Use the Optimal Order Quantity
Level: moderate
74. Which of the following is not one of the six ways to use inventory?
a) seasonal inventory
b) JIT inventory
c) pipeline inventory
d) hedge inventory
e) MRO inventory
Ans: b
Level: hard
75. The inventory objective of customer service is measured by any of the following except
_______________.
a) weeks of supply
b) percentage of dollar volume shipped on schedule
c) idle time due to component and material shortages
d) percentage of orders shipped on schedule
e) percentage of line items shipped on schedule
Ans: a
Level: hard
True/False
1. World-class companies are known for having zero WIP inventory in their facilities.
Ans: False
Level: hard
2. Firms that chase demand by hiring more workers have less need for anticipation inventory.
Ans: True
Level: moderate
3. Anticipation inventory is also called cycle stock.
Ans: False
Level: easy
4. When order quantities are higher, average transportation inventory is higher.
Ans: False
Level: hard
5. A long production run implies a large setup cost per unit.
Ans: False
Level: moderate
6. Inventory turnover is the reciprocal of weeks of supply.

Ans: False
Level: moderate
7. Inventory turnover is the reciprocal of years of supply.
Ans: True
Level: hard
8. In general, if car company A has a smaller weeks of supply than car company B does, then car
company A is using its inventory more effectively.
Ans: True
Level: hard
9. Any inventory turnover less than 4 is considered to be poor performance.
Ans: False
Level: moderate
10. Even if the company already owns the storage space and incurs no additional expense for
storing the inventory, we still include the cost of that storage space as part of holding costs.
Ans: False
Level: moderate
11. Whenever demand exceeds supply, the company experiences a lost sale.
Ans: False
Level: moderate
12. Even though loss of customer goodwill is an intangible cost, it is considered a type of
shortage cost.
Ans: True
Level: moderate
13. Lot-for-lot ordering is commonly used in materials requirements planning systems.
Ans: True
Level: hard
14. A min-max inventory system implies a larger average inventory than a periodic review
inventory system.
Ans: False
Level: hard
15. In the basic EOQ model, the maximum inventory level equals the economic order quantity.
Ans: True
Level: moderate
16. The reorder point is used in determining the order quantity in the periodic review system.
Ans: False
Level: moderate
17. Under a periodic review system, enough inventory must be carried to protect against stockout
for the replenishment lead time plus the review period.
Ans: True
Level: moderate
18. The two major decisions to be made when using the periodic review system are the target
inventory level and the order quantity.
Ans: False
Level: hard
19. In a periodic review system, the time between orders should never be based on the EOQ
calculation.
Ans: False
Level: moderate
20. In general, companies use periodic review systems for items that are expensive and/or critical
to the company.
Ans: False
Section Ref: The Single-Period Inventory Model
Level: moderate
21. The single-period inventory model objective is to balance the sale of a unit with the cost
incurred for each unit sold.
Ans: False
Level: hard
22. Inventory record accuracy is especially critical for master production schedule users.
Ans: True
Section Ref: Inventory Management Within OM: How it All Fits Together
Level: easy
23. Manufacturings cost efficiency is not affected by inventory decisions.
Ans: False
Level: moderate
24. Inventory management is a key component of effective supply chain performance.

Ans: True
Section Ref: The Supply Chain Link
Level: easy
Essay
1. What does WIP stand for?
Ans: work-in-process
Level: easy
2. What are items used in support of manufacturing and maintenance called?
Ans: maintenance, repair, and operational (MRO) inventory

Level: easy
3. What inventory function protects against supply shortages?
Ans: speculative inventory

Level: easy
4. What is another name for speculative inventory?
Ans: hedge inventory

Level: moderate
5. What is the formula for inventory turnover?
Ans: inventory turnover = annual cost of goods sold / average inventory in dollars
Level: moderate
6. What are the three major categories of holding costs?

Ans: capital costs, storage costs, and risk costs
Level: moderate
7. When a company experiences a stockout, what are the two possibilities?
Ans: back order and lost sale

Section Ref: Determining Order Quantities
Level: moderate
8. Discuss some of the factors on how much safety stock will be kept on hand.
Ans: The amount of safety stock to hold depends on the variability of demand and lead time and
the desired order-cycle service level.
Level: moderate
9. Describe advantages and disadvantages of periodic review systems.
Ans: An advantage is that inventory is counted only at specific time intervals. You do not
need to monitor the inventory level between review periods. This system also makes sense
when you order several different items from a supplier. A potential disadvantage includes
the varying replenishment levels, possibly precluding, for example, quantity discounts.
Also, the average inventory level will be larger than under reorder point systems.
Level: hard
10. Define periodic review system.
Ans: Requires periodic reviews of the on-hand quantity to determine the size of the
replenishment order.
Level: moderate
11. List some advantages of small order quantities.
Ans: improved customer responsiveness, reduced cycle inventory, reduced work-in-process

inventory, and reduced inventories of raw materials and purchased components
Section Ref: Justifying Smaller Order Quantities
Level: moderate
12. What are the characteristics of a single-period inventory model?
Ans: They are sold at their regular price only during a single time period. Demand for these
products is highly variable but follows known probability distribution. Salvage value of these
products is less than its original costs.
Level: hard
Problems
1. If a firm has an annual demand of 50,000 units and average transit time (in days) is 15, what is
the average transportation inventory?
Ans: 2055
Level: easy
2. Suppose that the annual cost of goods sold is $4,000,000, annual sales amount to $6,000,000,
and average inventory in dollars equals $2,000,000. What is the inventory turnover?
Ans: 2
Level: moderate
3. What is the target inventory if Franks dairy inventory review is every 7 days and they
consume an average of 15 cases of milk cartons every day? Franks new milk carton supplier
says they can deliver an order every 5 days. While Franks material coordinator says they should
order 45 cases at a time, what is their target inventory level if they do not want to maintain a
safety stock?
Ans: 180
Level: moderate
4. Toms tire shop annual demand is 1,460 tires and they are capable of producing 2,920 tires per
year per shift. Toms production manager plans to order 12 tires at a time. What is the maximum
inventory level?
Ans: 6
Level: easy
5. Suppose that the annual EOQ cost (ordering plus inventory holding) for a product stored in a
warehouse is $10,000. What would the total company EOQ cost be if the firm decided to equally
allocate the demand among five warehouses instead of one?
Ans: $22,361
Level: hard
6. Consider a firm with an annual demand of 6000 units, a setup cost of $20 per order, and an
annual holding cost per unit of $2. If the company purchases 1200 units every time that they
order, what are the total annual setup and holding costs?
Ans: $1300
Level: moderate
7. Troy Enterprises uses a continuous review inventory control system. The firm operates 50
weeks per year, with an annual demand of 50,000 units, an ordering cost of $35 per order, a
holding cost of $1 per unit per year, a lead time of 3 weeks, and a standard deviation of demand
during lead time equal to 216.51 units.
(a) How many units should be ordered at a time (rounded to the nearest unit)?
(b) What is the reorder point if a 94% order-cycle service level is desired?
Ans: (a) 1871; (b) 3337

Level: hard
8. Jefferson Products offers the following all-units quantity discount schedule for its 4 feet by 8
feet sheets of quality plywood.
Order Size Price

1-9 sheets $25
10-49 sheets $23
50-99 sheets $21
100 sheets or more $18
Washington Home Furnishings orders plywood from Jefferson Products. The firm has an
ordering cost of $50, an annual inventory holding cost percentage of 20%, and an annual demand
of 250 sheets. What should the order size be every time that an order is placed?
Ans: 100 units
Level: moderate
9. For a continuous review policy, 92% order-cycle service level, and standard deviation of
replenishment lead time of 189.31 units, how many units of safety stock should be held?
Ans: 266
Level: moderate
10. For a continuous review policy, if the standard deviation of replenishment lead time is 171.58
units and 266 units of safety stock are held, what is the implied order-cycle service level?
Ans: 93.943%
Level: hard
11. Consider a periodic review system with a lead time of 2 weeks, a review period of 4 weeks,
average weekly demand of 100 units, standard deviation of weekly demand of 20 units, and a
desired cycle-service level of 90%. (a) What is the target inventory level? (b) If it is time to
review the item and 10 units are on hand, how many units should be ordered?
Ans: (a) (100)(2+4) + 63 = 663 units; (b) 663 10 = 653 units

Level: hard
12. Suppose that your company sells a product for which the annual demand is 10,000 units.
Holding costs are $1.00 per unit per year, and setup costs are $200 per order
(a) What is the economic order quantity for your product?
(b) What is the total annual cost of ordering and holding?
(c) Now suppose that instead of purchasing the product, you decide to produce it yourself.
Assume the same demand and cost structure as above. In addition, your average production
rate would be 200 units per day, and you have 200 working days per year. What batch size
should you use?
(d) Given your answer to part c, now what is the total annual cost of ordering and holding?
(e) What conclusions can you make regarding the impact of production rate on the holding and
ordering costs?
Ans: (a) 2000 units; (b) $2000; (c) 2309 units; (d) $2020; (e) The lower the production rate,
the lower the effective holding cost, which implies larger batch sizes and lower total costs.
Level: hard
Short Answer
1. What is ABC Widget Company's inventory turns if it sells goods whose cost is $7,350,000 and
its average inventory is $1,225,000? ________________________
Ans: 6
Difficulty: moderate
2. The text discusses that in the service industry it is not uncommon for retailers not to be able to
______ specific merchandise.
Ans: locate
Section Ref: Inventory in Service Organizations
Difficulty: easy
3. The inventory method that places a maximum order when the on-hand inventory falls below a
predetermined minimum level is called the ____________
Ans: Min-mas system.

Section Ref: Determining Order Quantities
4. The reorder point for a product that is delivered two days after an order is placed and whose
average daily demand is 100 is ________________________
Ans: 200
Difficulty: easy
5. What is the total annual inventory cost (using basic EOQ )of a product whose annual demand
is 12,000 units, daily demand is 40, daily production is 60, order cost is $80, and holding cost is
$6? ________________________ Round to the nearest dollar.
Ans: $3,394.
Difficulty: hard
6. What is the basic EOQ for a product whose annual demand is 48000 with setup cost $15 and
holding cost $5? ________________________
Ans: 219
Difficulty: hard
7. What is the maximum inventory of a product that is produce in batches of 1000 when 500
units are produced per day and 250 units are sold per day? ________________________
Ans: 500
Difficulty: hard
8. What is the EPQ for a product whose annual demand is 48,000 with setup cost = $15, holding
cost = $6, daily demand 1,250, and daily production = 1500? ________________________
Ans: 1200
Difficulty: hard
9. What is the total annual inventory cost (using basic EPQ )of a product whose annual demand
is 15,000 units, daily demand is 40, daily production is 60, order cost is $80, and holding cost is
$6? ________________________ Round to the nearest dollar.
Ans: $2,191.
Difficulty: hard
10. How much safety stock should an organization hold if it wants to provide a 95% order-cycle
service level for an item whose annual demand is 12000 units with standard deviation of 300
units per year and 30 units during lead time. The organization uses 1.96 standard deviations for
this purpose. ________________________
Ans: 588
Section Ref: Why Companies Don't Always Use the Optimal Order Quantity

CH12-Inventory Management Policies

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File: ch12, Chapter 12: Inventory Management Policies

1. What does WIP stand for?

4. Finished goods in transit to the customer are called what?

6. Which inventory function provides a cushion against unexpected supply shortage?

7. Which inventory function helps firms garner quantity discounts?

10. Which inventory function provides a hedge against inflation?

13. In inventory management, when discussing customer service we mean:

15. Percentage of Line Items Shipped on Schedule recognizes that:

17. If a company carries 13 weeks of supply, what is the inventory turnover?

18. The formula to calculate a weeks of supply is?

20. All of the following affect holding costs except:

23. A SKU is a ______ at a _____ ______geographic location.

25. Which of the following is an assumption of the basic EOQ model?

26. Which of the following is an assumption of the basic EOQ model?

27. Which of the following is an assumption of the basic EOQ model?

28. Which of the following is an assumption of the basic EOQ model?

29. What costs are considered in the basic EOQ model?

36. What does EPQ stand for?

43. A (an) _________________ inventory record provides an up-to-date inventory balance by

45. Which of the following statements is not true?

46. What costs are considered in the quantity discount model?

54. What does TBO stand for?

60. The ranking in ABC inventory analysis is based on what?

62. Which of the following statements is true?

Units Ordered Price Per Unit

What is the optimal order quantity?

Units Ordered Price Per Unit EOQ at that Price

3. Anticipation inventory is also called cycle stock.

4. When order quantities are higher, average transportation inventory is higher.

5. A long production run implies a large setup cost per unit.

6. Inventory turnover is the reciprocal of weeks of supply.

7. Inventory turnover is the reciprocal of years of supply.

9. Any inventory turnover less than 4 is considered to be poor performance.

13. Lot-for-lot ordering is commonly used in materials requirements planning systems.

23. Manufacturings cost efficiency is not affected by inventory decisions.

24. Inventory management is a key component of effective supply chain performance.

1. What does WIP stand for?

2. What are items used in support of manufacturing and maintenance called?

Ans: maintenance, repair, and operational (MRO) inventory

3. What inventory function protects against supply shortages?

Ans: speculative inventory

4. What is another name for speculative inventory?

Ans: hedge inventory

5. What is the formula for inventory turnover?

6. What are the three major categories of holding costs?

7. When a company experiences a stockout, what are the two possibilities?

Ans: back order and lost sale

9. Describe advantages and disadvantages of periodic review systems.

10. Define periodic review system.

11. List some advantages of small order quantities.

Ans: improved customer responsiveness, reduced cycle inventory, reduced work-in-process

Ans: (a) 1871; (b) 3337

Order Size Price

Ans: (a) (100)(2+4) + 63 = 663 units; (b) 663 10 = 653 units

Ans: Min-mas system.

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23. A SKU is a ____ at a _ ____geographic location.