Chapter 7 Inv MGT

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
POINTS: 1
DIFFICULTY: Easy
KEYWORDS: Bloom’s: Application
OTHER: Analytic
NOTES: 7-1
2. Dependent Demand must be forecasted based on market conditions.

a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
KEYWORDS: Bloom’s: Knowledge
OTHER: Analytic
NOTES: 7-1
3. The four broad categories of inventory are raw materials, work-in-process, subassemblies, and finished goods.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-2
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
POINTS: 1
DIFFICULTY: Easy
KEYWORDS: Bloom’s: Comprehension
OTHER: Analytic
NOTES: 7-3
5. The term Cycle Counting is synonymous with physically counting inventory.

a. True
Cengage Learning Testing, Powered by Cognero Page 1
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-4
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-4
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-4
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-4
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-5
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-8
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-5
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-6
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-6
14. Relaxing the instantaneous replenishment assumption of the EOQ model results in the Economic Manufacturing
Quantity model.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-7
15. The optimal order quantity for the quantity discount model may exist at a price breakpoint.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-7
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-7
17. When demand and lead time are constant, reorder point is the demand during lead time.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-8
18. The continuous review inventory system requires less safety stock compared to the periodic review inventory system.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-9
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-9
20. The periodic inventory review system reviews physical inventory at specific points in time.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-9
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-1
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-1
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-1
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-2
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
c. allow production scheduling flexibility
d. purchase in bulk to take advantage of quantity discounts
e. maintain independence of operations (Decoupling)
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-2
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-3
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-3
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
POINTS: 1
DIFFICULTY: Easy
PREFACE NAME: ABC Inventory Matrix
KEYWORDS: Bloom’s: Analysis
OTHER: Analytic
NOTES: 7-4
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
POINTS: 1
DIFFICULTY: Easy
PREFACE NAME: ABC Inventory Matrix
OTHER: Analytic
NOTES: 7-4
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 Classification

Inventory
Value $
1 130 units $ 4.00
2 400 units 15.30
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
POINTS: 1
DIFFICULTY: Moderate
OTHER: Analytic
NOTES: 7-4
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-6
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.
d. the square root of the annual ordering cost.
e. cannot be determined because there is insufficient information provided.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-6

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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-6
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-6
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-6
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Diversity
NOTES: 7-5
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.
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-6
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-6
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-6
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-7
Figure 7-1
Use the graph below to answer the question(s).
41. Which of the following is TRUE in relation to Figure 7-1?

a. Curve J represents the annual ordering cost, and curve K represents the annual holding cost.
b. A lot size of G has an annual total cost of about C.
c. At lot size H both holding costs and ordering costs exceed the annual total cost.
d. The EOQ is most likely lot size G, and curve L is the annual ordering cost curve.
ANSWER: d

POINTS: 1
DIFFICULTY: Easy
PREFACE NAME: Figure 7-1
OTHER: Analytic
NOTES: 7-6
42. 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
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-9
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-8
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
POINTS: 1
DIFFICULTY: Easy
OTHER: Analytic
NOTES: 7-8
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
POINTS: 1
OTHER: Analytic
NOTES: 7-8
Subjective Short Answer
46. Briefly describe the differences between dependent and independent demand. Provide examples of dependent and
independent demand items for each of the following industries: automotive industry, personal computer industry, bicycle
industry
ANSWER:
a. Dependent demand items are those parts whose demand is based on the demand of the final
product in which the parts are used. Independent demand items are the end items consumers
typically buy, and whose demand is affected by trends, seasonal patterns, and general market
conditions. Service parts are also considered independent demand items.
b. Automotive Industry:
1. Independent demand item  car/truck and service parts.
2. Dependent demand item  tires, axle, steering wheel, and battery used to assemble
the automobiles.
c. Personal Computer Industry:
1. Independent demand item  computer/laptop computer and hardware sold directly to
the consumers.
2. Dependent demand item  monitor, CPU, and keyboard used to assemble the PC.
d. Bicycle Industry:
1. Independent demand item  bicycle
2. Dependent demand item  tires, handlebars, chain, and seats used to assemble the
bicycles.
POINTS: 5
OTHER: Communication
NOTES: 7-1

47. List four assumptions of the EOQ model.
ANSWER: a. Demand must be known and constant
b. Delivery time must be known and constant
c. Replenishment is instantaneous
d. Price is constant/quantity discounts are not allowed
e. Holding cost is known and constant
f. Ordering cost is known and constant
g. Stockouts are not allowed
POINTS: 5
NOTES: 7-6
48. Name and briefly describe the four basic types of inventory.
ANSWER: a. Raw materials − unprocessed, purchased inventory.
b. Work-in-process − partially processed inventory.
Finished goods − inventory or materials that have been completely processed or assembled,
c.
ready for sales or shipping to customers.
Maintenance, repairs and operating (MRO) supplies − (e.g., lubrication) goods used in the
d.
manufacturing process, but do not become parts of the finished goods.
POINTS: 5
NOTES: 7-2
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 – 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
POINTS: 5
DIFFICULTY: Difficult
NOTES: 7-7
Essay
50. Describe the ABC inventory matrix, and how is it used to manage inventory.
ANSWER: An ABC inventory matrix is used to assist in identifying obsolete stocks and to analyze whether a
company is stocking the correct inventory by comparing two ABC analyses. The vertical axis of the ABC
inventory matrix shows the firm's inventory classification based on inventory usage whereas the
horizontal axis shows the firm's inventory classification based on physical inventory.
Items appearing along the diagonal of the matrix suggest inventory matches sales. Items in the top left
triangle indicate under-stocked A and B items, where as items in the lower right triangle suggest
overstocked B and C items, or obsolete stocks.
POINTS: 10
NOTES: 7-4
51. What is Radio Frequency Identification (RFID)? Provide four examples or scenarios of how RFID can be used to aid
in supply chain management.
ANSWER: RFID aids in inventory management by making it easier to track inventory in the supply chain. It can
synchronize information and physical flow of goods across the supply chain from manufacturers to retail
outlets and to the consumers. Moreover, it is also very useful for tracking returned goods through the
supply chain and to prevent counterfeit. For examples,
a. Materials management: As supply vehicle enters the warehouse, the fixed-portal RFID
reader positioned at the entrance reads the tags on the pallets or individual items to provide
handling, routing, and storage information of the incoming goods, and inventory status can
be updated automatically.
b. Manufacturing: An RFID tag can be placed on the unit being produced so that specific
customer configurations can be incorporated automatically during the production process.
This is invaluable in a make-to-order environment.
c. Distribution center: As the logistics vehicle arrives at the loading dock, the fixed-portal
RFID reader communicates with the tag on the vehicle to confirm that it is approved to
pickup goods. When the loaded vehicle leaves the dock and crosses the portal, the reader
picks up the signals from the tags to alert the RFID software and ERP system to update the
inventory automatically and initiate an advanced shipping notice (ASN), proof of pickup,
and invoices.
d. Retail store: As delivery vehicle enters the unloading dock, the fixed-portal reader picks up
the signals from the tags, and the RFID software application processes the signals to
provide specific handling instructions and initiates automatic routing of the goods. RFID
reader can also be placed on the store shelf to trigger automatic replenishments when an
item reaches its reorder point. Moreover, inventory status can be updated automatically in
real time at any stage of the supply chain, and handheld readers can be used to assist in
cycle counting.
POINTS: 10
NOTES: 7-5
52. Use the graph below to answer the questions that follow.
Identify the Annual Holding Cost curve. Provide a brief description of what the Annual
a.
Holding Cost curve represents.
Identify the Annual Ordering Cost curve. Provide a brief description of what the Annual
b.
Ordering Cost curve represents.
Identify the Annual Total Cost Curve. Provide a brief description of what the Annual Total
c.
Cost curve represents.
Identify the Economic Order Quantity. Provide a brief description of what the Economic
d.
Order Quantity represents.
ANSWER: Identify the Annual Holding Cost curve. Provide a brief description of what the Annual
a.
Holding Cost curve represents.
Curve K. Curve K represents the cost to a firm for holding inventory for an entire year. The
larger the order size, the more inventory a firm holds, thus the higher the annual cost of
holding inventory.
Identify the Annual Ordering Cost curve. Provide a brief description of what the Annual
b.
Ordering Cost curve represents.
Curve L. Curve L represents the cost to a firm for ordering inventory for an entire year.
The larger the order size, the fewer orders required to accumulate a year's worth of
inventory, thus the lower the annual cost of holding inventory.
c. Identify the Annual Total Cost Curve. Provide a brief description of what the Annual Total

Cost curve represents.
Curve J. Curve J is the sum of Curve K and Curve L. It begins very high as ordering costs
are very high to begin, but as curve L and curve K near intersection, annual costs decrease.
The intersection of K and L represents the lowest annual total cost, and thus reveals the
EOQ. After K and L intersect, annual total cost again begins to increase.
Identify the Economic Order Quantity. Provide a brief description of what the Economic
d.
Order Quantity represents.
The EOQ is the order size at which annual holding cost and annual ordering cost are equal,
and where annual total cost is at its minimum. On this chart the EOQ is point G.
POINTS: 10
NOTES: 7-6

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Chapter 7 Inv MGT

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Chapter 7 - Inventory Management

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

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

Cengage Learning Testing, Powered by Cognero Page 2

21. Dependent demand and independent demand items differ in that

Cengage Learning Testing, Powered by Cognero Page 5

23. Which of the following cannot be considered as independent demand items?

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

ABC Inventory Matrix

Cengage Learning Testing, Powered by Cognero Page 7

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

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

Item # Annual Sales Unit Cost Current Classification

Cengage Learning Testing, Powered by Cognero Page 9

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

Cengage Learning Testing, Powered by Cognero Page 10

Cengage Learning Testing, Powered by Cognero Page 11

40. The EOQ model with quantity discounts attempts to determine

41. Which of the following is TRUE in relation to Figure 7-1?

Cengage Learning Testing, Powered by Cognero Page 12

Subjective Short Answer

Cengage Learning Testing, Powered by Cognero Page 14

For $4 cigars, EOQ = = 829 (infeasible, since EOQ > 500.

but < 1000.

so must order 1001 to get the discount.

TIC3.50 = O+I+P = (75) + (.3)(3.50) + 5500(3.50) = $465.58 +

TIC3.25 = O+I+P = (75) + (.3)(3.25) + 5500(3.25) = $412.09 +

Cengage Learning Testing, Powered by Cognero Page 17

Cengage Learning Testing, Powered by Cognero Page 18

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