Chapter 7 - Inventory Management

True / False

1. Service parts sold to the repair shops are examples of dependent demand.
a. True
b. False
ANSWER: False

2. Dependent Demand must be forecasted based on market conditions.

a. True
b. False
ANSWER: False
3. The four broad categories of inventory are raw materials, work-in-process, subassemblies, and finished
goods.
a. True
b. False
ANSWER: False

4. Inventory turnover ratio shows how many times a firm turns over its inventory in an accounting period.
Faster turnovers are generally viewed as negative because it indicates instability in the firm's inventory level.
a. True
b. False
ANSWER: False

5. The term Cycle Counting is synonymous with physically counting inventory.

a. True
b. False
ANSWER: True

6. The ABC inventory control system categorizes inventory items into three groups, A, B, and C. A items are
given highest priority, while C items have the lowest priority. Prioritization may be based on annual dollar
usage, shelf life, or sales volume.
a. True
b. False
ANSWER: True

7. Pareto Analysis is an inventory model used to determine the optimal order size that minimizes total annual
inventory costs.
a. True
b. False
ANSWER: False

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Chapter 7 - Inventory Management
8. The ABC inventory matrix shows an ABC inventory classification based on annual usage on the vertical axis
and an ABC inventory classification based on physical inventory on the horizontal axis.
a. True
b. False
ANSWER: True

9. Radio Frequency Identification (RFID) is considered an eventual replacement of bar code because of its
ability to store huge amounts of information to differentiate goods at the item level.
a. True
b. False
ANSWER: True

10. When both the demand and lead time of a product are variable, firms keep a higher safety stock level when
compared to variations in only the demand or only the lead time.
a. True
b. False
ANSWER: True

11. An RFID reader does not require direct line of sight to read the information stored in an RFID tag.
a. True
b. False
ANSWER: False

12. The EOQ, also known as the economic order quantity, is the order size where annual inventory holding
costs equal annual ordering costs.
a. True
b. False
ANSWER: True

13. The total annual inventory cost is the sum of the annual purchase cost, the annual holding cost, the annual
capacity cost, and the annual ordering cost.
a. True
b. False
ANSWER: False

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Chapter 7 - Inventory Management
14. Relaxing the instantaneous replenishment assumption of the EOQ model results in the Economic
Manufacturing Quantity model.
a. True
b. False
ANSWER: True

15. The optimal order quantity for the quantity discount model may exist at a price breakpoint.
a. True
b. False
ANSWER: True

16. In the Economic Manufacturing Quantity model, the annual consumption rate must be higher than the
annual production rate.
a. True
b. False
ANSWER: False

17. When demand and lead time are constant, reorder point is the demand during lead time.
a. True
b. False
ANSWER: True

18. The continuous review inventory system requires less safety stock compared to the periodic review
inventory system.
a. True
b. False
ANSWER: False

19. The (s, S) continuous review inventory system orders the same quantity Q when physical inventory reaches
the reorder points.
a. True
b. False
ANSWER: False

20. The periodic inventory review system reviews physical inventory at specific points in time.
a. True
b. False
ANSWER: True

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Chapter 7 - Inventory Management

Multiple Choice

21. Dependent demand and independent demand items differ in that

I. for any product, all components are dependent-demand items
II. the need for independent-demand items is forecast
III. the need for dependent-demand items is calculated
a. I only
b. I & II only
c. I & III only
d. II & III only
e. I, II & III
ANSWER: e

22. Which of the following would most likely be considered a dependent demand item?
a. Bicycle tires used to assemble a bicycle
b. Television (TV)
c. Couch
d. Lawn Mower
ANSWER: a
23. Which of the following cannot be considered as independent demand items?
a. wholesale and retail merchandise items
b. maintenance, repair, and operating supplies at a manufacturing company
c. maintenance, repair, and operating supplies at a service firm
d. raw material items that become part of the final product at a manufacturing firm
e. service industry items such as hospital supplies or office supplies for law firms
ANSWER: d

24. ____, such as lubricants for machines, are used in the production process, but do not become parts of the
final products.
a. Raw materials
b. Work-in-process
c. Maintenance, repair and operating supplies
d. Finished goods
e. Cycle stock
ANSWER: c

25. Companies hold a supply of inventory for all of the following reasons EXCEPT:
a. meet variation in product demand
b. increase production change/setup costs
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Chapter 7 - Inventory Management
c. allow production scheduling flexibility
d. purchase in bulk to take advantage of quantity discounts
e. maintain independence of operations (Decoupling)
ANSWER: b

26. Which of the following is a disadvantage of excessive inventory?

a. it creates an unnecessary waste of scarce resources.
b. It leads to higher inventory ordering cost.
c. It leads to lower average inventory.
d. It eliminates cycle stock.
e. It reduces the need to conduct cycle count.
ANSWER: a

27. Which of the following is not an example of an ordering cost for products purchased from a supplier?
a. the cost of transmitting the order
b. the cost of receiving the product
c. the cost associated with processing the invoice
d. the cost of pilferage while in storage
e. the cost of clerical staff for preparing the purchase
ANSWER: d

ABC Inventory Matrix

Use the graph below to answer the question(s).

28. In the ABC Inventory Matrix, inventory in area Y suggests

a. under-stocked A and B items.
b. under-stocked B and C items.
c. overstocked A and B items.
d. over-stocked B and C items.
e. inventory matches sales.
ANSWER: e

29. In the ABC Inventory Matrix, inventory in area Z suggests

a. under-stocked A and B items.
b. under-stocked B and C items.
c. overstocked A and B items.
d. over-stocked B and C items.
e. inventory matches sales.
ANSWER: d

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Chapter 7 - Inventory Management
30. Classify the following inventory items as either A, B, or C items according to the ABC analysis method:

Item # Annual Sales Unit Cost Current Inventory Value $ Classification

1 130 units $ 4.00

2 400 units 1 5.30

3 25 units 17.00

4 1320 units 1.25

5 90 units 2.10

a. item 1 (B), item 2 (A), item 3 (A), item 4 (C), item 5 (C)
b. item 1 (C), item 2 (B), item 3 (C), item 4 (A), item 5 (C)
c. item 1 (A), item 2 (B), item 3 (C), item 4 (A), item 5 (B)
d. item 1 (B), item 2 (C), item 3 (B), item 4 (C), item 5 (A)
e. item 1 (C), item 2 (A), item 3 (C), item 4 (B), item 5 (C)
ANSWER: e

31. The primary purpose of the basic economic order quantity model is
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

32. If an item is ordered at its economic order quantity, the annual carrying cost should be:
a. slightly less than the annual ordering cost.
b. equal to the annual ordering cost.
c. twice the annual purchase price.

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Chapter 7 - Inventory Management
d. the square root of the annual ordering cost.
e. cannot be determined because there is insufficient information provided.
ANSWER: b

33. What inventory factor may be omitted from the basic EOQ derivation because it is a constant?
a. Annual order-processing cost
b. Annual purchase cost of goods
c. Annual capital cost
d. Annual setup costs
e. all of these
ANSWER: b

34. Which of the following is not an assumption of the economic order quantity model?
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

35. The cost of a widget is $5, and the carrying rate is 40%; cost of processing an order is $25, annual demand
is for 400 widgets, and supply and usage patterns are stable. What is the economic order quantity (EOQ)?
a. 5
b. 20
c. 25
d. 100
e. 200
ANSWER: d

36. Which of the following is a global RFID challenge?

a. Foreign firms are skeptical about sharing potentially confidential information with foreign
businesses.
b. Globally, the RFID industry does not have its own UHF spectrum allocation.
c. UHF signals are reflected by metal and absorbed by water.
d. All of the above.
e. None of these.
ANSWER: d

37. Which one of the following statements regarding the economic order quantity is true?
a. The EOQ model combines several different item orders to the same supplier.
b. If an order quantity is larger than the EOQ, the annual holding cost exceeds the annual ordering
cost.
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Chapter 7 - Inventory Management
c. The EOQ model assumes a variable demand pattern.
d. When the interest rate drops, both the holding cost and the EOQ decreases.
e. EOQ is used to determine the optimum shipping quantity.
ANSWER: b

38. Use this information below to calculate the optimal order quantity:
Annual demand for backpacks is 43,000 units
The cost to place an order is $220
The per unit cost of the item is $60.00
The annual holding rate is 37.5%

Choose the closest answer.

a. 920 units
b. 250 units
c. 710 units
d. 830 units
ANSWER: a

39. If your company had an annual purchase cost of items equal to $2,000,000, an annual holding cost of
$150,000 and an annual ordering cost of $750,000 this scenario would reveal that:
a. Your fixed lot size was lower than the EOQ
b. Your fixed lot size was equal to the EOQ
c. Your fixed lot size was higher than the EOQ
d. Nothing because there is insufficient information to discern where the EOQ would be.
ANSWER: a

40. The EOQ model with quantity discounts attempts to determine

a. what is the lowest purchasing price.
b. whether to use fixed-quantity or fixed period order policy.
c. how many units should be ordered.
d. what is the shortest lead time.
e. what is the lowest amount of inventory necessary to satisfy a certain service level.
ANSWER: c

41. Which of the following is true under the Periodic Review System:
a. a lower level of safety stock is needed to buffer against uncertainty in demand over a longer
planning horizon
b. a higher level of safety stock is needed to buffer against uncertainty in demand over a longer
planning horizon
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Chapter 7 - Inventory Management
c. it is more expensive to administer
d. The only uncertainty is the magnitude of demand during the delivery lead time
e. there are no discrepancies between physical inventory and the stock record
ANSWER: b

43. When demand and delivery lead time are known and constant, and demand is eight per day, and purchase
lead time is four days, the reorder point is:
a. 3.
b. 8.
c. 32.
d. 35.
e. 56.
ANSWER: c

44. When demand and delivery lead time are known and constant, reorder point is the ____.
a. demand during lead time
b. safety stock
c. sum of demand during lead time and safety stock
d. economic order quantity
e. average inventory
ANSWER: a

45. The UNLV Bookstore sells a unique calculator to college students. The demand for this calculator has a
normal distribution with an average daily demand of 20 units and a standard deviation of 4 units per day. The
lead time for this calculator is very stable at 9 days. Compute the statistical reorder point that results in a 95
percent in-stock probability (Z = 1.65).
a. 19.8 units
b. 80 units
c. 180 units
d. 199.8 units
e. 720 units
ANSWER: d

49. The manager at Robert’s Cigars wants to determine the lowest cost order policy given the following
purchase discounts offered: cigar costs are $4 each for orders less than 500; $3.50 each for orders of 500 –
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Chapter 7 - Inventory Management
1000; and $3.25 each for orders greater than 1000. The order cost = $75, annual demand forecast = 5500 cigars,
inventory carrying cost = 30% per year.
ANSWER: Step 1 Determine the 3 EOQ’s—
For $4 cigars, EOQ = = 829 (infeasible, since EOQ > 500.
For $3.50 cigars, EOQ = = 886 (feasible range, since EOQ > 500 but < 1000.
For $3.25 cigars, EOQ = = 920 (infeasible, since EOQ < 1000, so must order 1001 to get the discount.

Step 2 Calculate the total annual inventory costs for the $3.50 and the $3.25 cigars:
TIC3.50 = O+I+P = (75) + (.3)(3.50) + 5500(3.50) = $465.58 + $465.15 + $19,250 = $20,180.73
TIC3.25 = O+I+P = (75) + (.3)(3.25) + 5500(3.25) = $412.09 + $487.99 + $17,875 = $18,775.08

So, the lowest cost order policy is to order 1001 cigars at a time for a total inventory cost of $20,180.73

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