MULTIPLE CHOICE

1. All of the following are limitations of high levels of work-in-process and finished goods inventory
except
a. More difficult to change product lines
b. Acts as a buffer between work stations
c. Limits flexibility to meet changing customer needs
d. Hides problems
ANS: B

2. Inventory that has been ordered but not yet received and is in transit is called
a. Raw materials
b. Pipeline
c. Anticipation
d. Cycle
ANS: B

3. ____________ is inventory that results from purchasing or producing in larger lots than are needed for
immediate consumption or sale.
a. Cycle
b. Anticipation
c. Safety
d. Work-in-process
ANS: A

4. Inspecting, unpacking and storing are components of

a. Ordering or setup
b. Holding
c. Shortage
d. Unit costs
ANS: A

5. The largest component of holding cost is

a. Taxes
b. Insurance
c. Handling
d. Capital costs
ANS: D

6. Independent demand
a. Can be derived/calculate
b. Related to other SKUs
c. Are also called raw materials
d. Need to be forecasted
ANS: D

7. Which of the following is incorrect regarding inventory management?

a. The two fundamental inventory decisions are 1) when to order and 2) what to order
b. Inventory can be intangibles -- for example, best-practice knowledge base
c. Stochastic demand by its nature cannot be stable and deterministic demand by its nature

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 cannot by dynamic
d. SKUs are often aggregated or partitioned into groups with similar characteristics or dollar
value
ANS: C

8. Backorders are
a. Not planned
b. Generally more expensive than stockouts
c. Used to smooth demand
d. Used with perishable assets
ANS: C

9. Using ABC analysis, continuous monitoring and accurate record keeping relates best to ____________
items.
a. A
b. B
c. C
d. B and C
ANS: A

10. Which is not correct regarding cycle counting?

a. Errors are detected on a more timely basis and causes can be investigated and corrected.
b. A-items are counted more frequently.
c. Annual physical inventory counts are eliminated.
d. Each employee does their own cycle counting
ANS: D

11. Which of the following is not true regarding radio frequency identification (RFID) chips?
a. Allows scanners to track SKUs as they move throughout a store
b. Will make employee scanning time quicker
c. Can help track inventory on a self to trigger replenishment orders
d. Recalled or expired products can be identified and pulled from the store
ANS: B

12. Inventory position is affected by all the following except

a. On hand
b. Scheduled receipts
c. Backorders
d. Variability
ANS: D

13. Using a fixed inventory system, as the reorder point r increases

a. Safety stock increases
b. Safety stock decreases
c. The number of orders increases
d. The number of orders decreases
ANS: A

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14. Which of the following is not a key assumption underlining the classic economic order quantity
model?
a. The entire order quantity arrives in the inventory at one time
b. There are only two types of relevant costs: order/setup and inventory-holding
c. Storage/warehouse capacity is a bottleneck/constraint
d. Allows no stockouts
ANS: C

15. The EOQ model

a. Is very sensitive
b. Is relatively flat (shallow) around the minimum
c. Balances holding costs and stockout costs
d. Allows for variable demand
ANS: B

16. Which of the following is least related to the others?

a. Service level
b. Probability of stockout
c. Safety stock
d. Optimal solution
ANS: D

17. Lead-time is currently one week. The average demand during the week is 100 units with a standard
deviation of 20 units. If the supplier increases lead-time to 4 weeks, what will be the standard
deviation of lead-time demand?
a. 40
b. 80
c. 17.89
d. 44.72
ANS: A

18. Which is not an advantage of the periodic review system?

a. Helps to control “A” items
b. Inventory need not be monitored continually
c. Useful when a large number of items is ordered from the same supplier
d. Consolidated shipments lower freight costs
ANS: A

19. Which of the following is not true regarding the EOQ model with back orders?
a. (Q-S) Units will be placed in inventory
b. Backorders increase the total cost for the customer because of a higher sales cost
c. Part of backorder costs can be expresses as loss of good will
d. Used when holding cost is high
ANS: B

20. Using the quantity discount model, if a firm orders a larger quantity than the EOQ, which annual cost
usually goes down?
a. Purchase and holding
b. Holding and ordering
c. Purchase and ordering

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 d. Safety and holding
ANS: C

21. In one lead-time, the probability of a stockout is the probability that

a. Demand will be greater than the reorder level
b. Demand will be less than the reorder level
c. Supply will be greater than the reorder level
d. Supply will be less than the reorder level
ANS: A

22. Average inventory is defined as

a. The order quantity divided by the number of inventory cycles per year
b. Annual usage divided by the number of inventory cycles per year
c. One-half the order quantity plus safety stock
d. One-half the annual usage
ANS: C

23. ____________ is the result of dividing the annual demand by the quantity ordered (Q) each time.
a. Annual number of orders placed
b. Average inventory
c. Maximum inventory
d. Days of lead-time
ANS: A

PROBLEMS

Exhibit 12.1

SKU ANNUAL USAGE ITEM VALUE ($)

A 2,800 0.22

B 300 50.00

C 275 11.00

D 700 8.00

E 45 400.00

F 1,250 0.80

G 2,000 0.60

____________________________________________________________________

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1. Utilizing the Pareto ABC classification and Exhibit 12.1, which of the seven (7) SKUs should be
assigned to the A group?
a. A and G
b. B and E
c. A, F and G
d. Only E

ANS:
b. B and E

2. Using the data in Exhibit 12.1, and if A, C, F, and G were classified as C items, determine the
percentage of SKUs they represent.
a. 57.14%
b. 15.43%
c. 88.85%
d. 2.68%

ANS:
a. 57.14%

Exhibit 12.2

SKU ANNUAL USAGE ITEM VALUE ($)

1 9,000 80.00

2 12,000 58.80

3 24,000 76.20

4 42,000 48.00

5 55,000 30.00

6 140,000 2.20

7 33,000 48.00

8 3,000 110.00

____________________________________________________________________

3. Given the data in Exhibit 12.2, use ABC analysis to determine which items should be classified as C.

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 a. 5 and 6
b. 6 and 8
c. 1 and 8
d. 3 and 4

ANS:
b. 6 and 8

4. Given the data in Exhibit 12.2 and if SKUs 1 and 2 are classified as B items, which percent of value do
they represent?
a. 30.63%
b. 25.00%
c. 6.60%
d. 15.59%

ANS:
d. 15.59%

Exhibit 12.3

Annual Demand: 8,000 units

Week Operating: 52/year
Standard Deviation of Weekly Demand: 14 units
Ordering Cost: $35/order
Holding Cost: $4/unit/year
Cycle-Service Level: 94%
Lead-Time: 3 weeks

____________________________________________________________________

5. Using the data in Exhibit 12.3 and the fixed order quantity system, compute the EOQ.
a. 374.2
b. 51.9
c. 42.8
d. 187.1

ANS:
a. 374.2

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 6. Based on the data in Exhibit 12.3 and assuming an order quantity of 500, determine the total cost of
ordering and holding the EOQ?
a. $6,634
b. $1,560
c. $2,245
d. $39

ANS:
b. $1,560

7. Given the data in Exhibit 12.3, determine the amount of safety stock needed if the organization desires
a 94% cycle service level.
a. 21.8
b. 65.3
c. 31.0
d. 37.7

ANS:
d. 37.7

8. Given the data in Exhibit 12.3 and a cycle service level of 90%, determine the reorder point.
a. 191.5
b. 499.2
c. 485.8
d. 483.3

ANS:
c. 485.8

Exhibit 12.4
A retailer has the following data on a popular model digital camera:
Demand: 15,000 units/year
Open for business: 52 weeks/year
Standard Deviation of Weekly Demand: 25 units
Ordering Costs: $60/order
Holding Costs: $7/unit/year
Cycle-Service Level: 88%

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 Lead-Time: 5 weeks

____________________________________________________________________

Using the information shown in Exhibit 12.4, determine the EOQ for a fixed quantity system.
a. 59
b. 70
c. 192
d. 507

ANS:
d. 507

10. Using the information shown in Exhibit 12.4 and an order quantity of 600, calculate the total ordering
and holding costs.
a. $15,420
b. $3,600
c. $5,324
d. $5,360

ANS:
b. $3,600

11. Given the data in Exhibit 12.4, determine the amount of safety stock needed if the retailer wants an
88% cycle-service level.
a. 58.75
b. 117.50
c. 98.00
d. 64.00

ANS:
a. 58.75

12. Given the data in Exhibit 12.4 and a cycle service level of 98%, determine the reorder point.
a. 347.20
b. 1,251.80
c. 1,556.91
d. 386.50

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 ANS:
c. 1,556.91

Exhibit 12.5

Demand: 7,200/year
Operating: 52 weeks/year
Standard Deviation of Weekly Demand: 18 units
Ordering Costs: $50/order
Holding Costs: $8/unit/year
Cycle-Service Level: 92%
Lead-Time: 3 weeks

____________________________________________________________________

13. Using the data in Exhibit 12.5, compute the fixed review period (T) and round the answer to the
nearest integer, i. e. 8.72 weeks is 9 weeks.
a. 1
b. 2
c. 4
d. 5

ANS:
b. 2

14. Given the data in Exhibit 12.5 and assuming a review period (T) of two weeks, determine the
replenishment level (M) for a fixed period system.
a. 727
b. 819
c. 798
d. 749

ANS:
d. 749

Exhibit 12.6

EOQ: 200 units

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 Demand: 10,000 units/year
Standard Deviation of Weekly Demand: 22
Cycle-Service Level: 98%
Lead-Time: 2 weeks
Company Operates: 52 weeks a year

_______________________________________________________________________________

Using a fixed review period model and the data shown in Exhibit 12.6, determine the fixed review
period (T) and round to the nearest integer, i. e. 2.25 is 2 weeks.
a. 1
b. 2
c. 3
d. 4

ANS:
a. 1

16. Using the data in Exhibit 12.6, and assuming a review period (T) of one week, determine the
replenishment level (M) for a fixed period system and a cycle-service level of 98%.
a. 803
b. 449
c. 713
d. 655

ANS:
d. 655

17. The annual demand for a certain SKU is 600 units; ordering cost is $10/order; and carrying cost is
30% of the price of an item. Price is established by the supplying organization based on the following
quantity discount schedule. What should the order quantity be in order for the purchasing firm to
minimize total annual costs?

QUALITY: PRICE/UNIT:
1-49 $5.00
50-249 $4.50
250 + $4.10

a. 49.00
b. 94.28

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 c. 98.77
d. 250.00

ANS:
d. 250.00

18. The price break for an item with uniform demand follows:

QUANTITY COST
1-1499 $1.10 each
1500-2999 $1.05 each
3000 + $0.98 each

Ordering cost is $40 per order and demand is 32,850 units per year. Holding cost is 35% of the item
cost. What quantity should be ordered to minimize total costs.
a. 2,768
b. 2,674
c. 2,612
d. 3,000
ANS:
d. 3,000

19. A 4th of July celebration T-shirt for this year will cost festival organizers $12 each and will sell for
$25 before and on July 4th. Any unsold T-shirts can usually be disposed of at a discount after the
festival for $5 each. If demand is normally distributed with a mean of 1,800 T-shirts and a standard
deviation of 75, how many T-shirts should be ordered?
a. 1,829
b. 1,771
c. 1,849
d. 1,826

ANS:
a. 1,829

20. A merchant wants to stock Christmas trees. She can place only one order per season. The merchant
pays $30 for each tree and sells them for $80 each. She will incur an additional cost of $6 each for
unsold trees that must be hauled to the landfill. If demand for Christmas trees is normally distributed
with a mean of 365 trees and a standard deviation of 46 trees, how many trees should she order?
a. 380
b. 374
c. 356

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d. 392

ANS:
b. 374

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