File: ch13, Chapter 13: Inventory Management

Multiple Choice

48. A company may purchase larger amounts of inventory for all the following
reasons except
a. to reduce inventory carrying costs.
b. to take advantage of quantity discounts.
c. as a hedge against future price increases.
d. to obtain lower prices purchasing in volume.
Ans: A
Difficulty: Moderate
Learning Objective: LO 1

49. Inventory management includes all the following activities except determining
a. the amount of inventory to keep in stock.
b. customer demand .
c. how much to order.
d. when to order.
Ans: B
Difficulty: Easy
Learning Objective: LO 1

50. ________________ is additional inventory kept at various stages of the production

process to provide independence between stages to avoid work stoppages.
a. Safety stock
b. Buffer stock
c. Finished stock
d. None of these answer choices is correct.
Ans: B
Difficulty: Easy

Learning Objective: LO 1

51. ________________ is additional inventory kept on hand to meet variations in product

demand.
a. Safety stock
b. Buffer stock
c. Finished stock
d. None of these answer choices is correct.
Ans: A
Difficulty: Easy
Learning Objective: LO 1

52. Inventory costs _________________ when higher levels of inventory are needed to
improve customer service.
a. decrease
b. stay the same
c. increase
d. cannot be estimated
Ans: C
Difficulty: Moderate
Learning Objective: LO 2

53. Customer service is defined as the ability to satisfy ______________ demand.

a. internal
b. external
c. internal and external
d. None of these answer choices is correct.
Ans: C
Difficulty: Moderate
Learning Objective: LO 2

54. The traditional approach to inventory management is to maintain a level of inventory

that
a. minimizes inventory cost.
b. maximizes customer service.
c. maintains a balance between inventory cost and customer service.
d. None of these answer choices is correct.
Ans: C
Difficulty: Moderate

Learning Objective: LO 2

55. Which of the following is not considered a form of inventory?

a. items being transported
b. tools and equipment
c. purchased parts and supplies
d. backorders
Ans: D
Difficulty: Easy
Learning Objective: LO 3

56. Which of the following is not an example of inventory carried to satisfy independent
demand?
a. spare parts
b. finished product
c. raw materials
d. All the answer choices are correct.
Ans: C
Difficulty: Moderate
Learning Objective: LO 3

57. ___________ demand items are used in the process of producing a final product.
a. Dependent
b. Independent
c. Seasonal
d. Cyclical
Ans: A
Difficulty: Moderate
Learning Objective: LO 3

58. Receiving, handling and shipping costs are examples of

a. shortage costs.
b. carrying costs.
c. ordering costs.
d. None of these answer choices is correct.
Ans: C
Difficulty: Moderate
Learning Objective: LO 3

59. In general, as the order size increases

a. ordering costs decrease and carrying costs increase.
b. ordering costs increase and carrying costs decrease.
c. both ordering and carrying costs increase.
d. both ordering and carrying costs decrease.
Ans: A
Difficulty: Moderate
Learning Objective: LO 3

60. The _______________ classification system classifies inventory according to its

dollar value to the firm.
a. periodic
b. continuous
c. ABC
d. EOQ
Ans: C
Difficulty: Moderate

Learning Objective: LO 4

61. A service level of 95% means there is a 0.95 probability

a. of a stockout.
b. that supply will exceed demand.
c. that demand will be met during the lead time.
d. None of these answer choices is correct.
Ans: D
Difficulty: Moderate

Learning Objective: LO 4

62. A continuous inventory system is also known as a

a. fixed-time period system
b. fixed-order quantity system
c. fixed-lead time system
d. fixed-amount system
Ans: B
Difficulty: Easy
Learning Objective: LO 4

63. A periodic inventory system is also known as a

a. fixed-time period system.
b. fixed-order quantity system.
c. fixed-lead time system.
d. fixed-amount system.
Ans: A
Difficulty: Easy

Learning Objective: LO 4

64. A restaurant currently uses 62,500 boxes of napkins each year at a constant daily rate.
If the cost to order napkins is $200.00 per order and the annual carrying cost for one box
of napkins is $1.00, then the economic order quantity for napkins is
a. 62,500 boxes.
b. 10,000 boxes.
c. 5,000 boxes.
d. 2,500 boxes.
Ans: C
Difficulty: Moderate
Learning Objective: LO 5

65. A restaurant currently uses 62,500 boxes of napkins each year at a constant daily rate.
The cost to order napkins is $200.00 per order and the annual carrying cost for one box of
napkins is $1.00. If the restaurant orders the economic order quantity each time an order
is placed, then ______orders are placed during the year.
a. 13
b. 15
c. 20
d. 25
Ans: A
Difficulty: Moderate

Learning Objective: LO 5

66. A restaurant currently uses 62,500 boxes of napkins each year at a constant daily rate
over the 365 days that it is open. The cost to order napkins is $200.00 per order and the
annual carrying cost for one box of napkins is $1.00. If the restaurant orders the
economic order quantity then the time between orders (order cycle) is
a. 125 days.
b. 75.3 days.
c. 32.8 days.
d. 29.2 days.
Ans: D
Difficulty: Moderate
Learning Objective: LO 5

67. A restaurant currently uses 62,500 boxes of napkins each year at a constant daily rate.
The cost to order napkins is $200.00 per order and the annual carrying cost for one box of
napkins is $1.00. If the restaurant orders the economic order quantity then the total
annual inventory cost for napkins is
a. $62,500.
b. $5,000.
c. $2,500.
d. $1,250.
Ans: B
Difficulty: Moderate

Learning Objective: LO 5
68. A restaurant currently uses 62,500 boxes of napkins each year at a constant daily rate.
The cost to order napkins is $200.00 per order and the annual carrying cost for one box of
napkins is $1.00. If the restaurant orders the economic order quantity then the average
inventory for napkins is
a. 62,500 boxes.
b. 31,250 boxes.
c. 5,000 boxes.
d. 2,500 boxes.
Ans: D
Difficulty: Moderate
Learning Objective: LO 5

69. Annual demand for a product is 40,000 units. The product is used at a constant rate
over the 365 days the company is open every year. The annual holding cost for the
product is estimated to be $2.50 per unit and the cost of placing each order is $125.00. If
the company orders according to the economic order quantity (EOQ) formula then its
optimal order size for this product is
a. 2,000 units.
b. 4,000 units.
c. 20,000 units.
d. 40,000 units.
Ans: A
Difficulty: Moderate
Learning Objective: LO 5

70. Annual demand for a product is 40,000 units. The product is used at a constant rate
over the 365 days the company is open every year. The annual holding cost for the
product is estimated to be $2.50 per unit and the cost of placing each order is $125.00. If
the company orders according to the economic order quantity (EOQ) formula then
________ orders are placed annually.
a. 5
b. 10
c. 15
d. 20
Ans: D
Difficulty: Moderate

Learning Objective: LO 5

71. Annual demand for a product is 40,000 units. The product is used at a constant rate
over the 365 days the company is open every year. The annual holding cost for the
product is estimated to be $2.50 per unit, and the cost of placing each order is $125.00. If
the company orders according to the economic order quantity (EOQ) formula, then the
time between orders (order cycle time) is
a. 18.25 days.
b. 24.33 days.
c. 36.5 days.
d. 73 days.
Ans: A
Difficulty: Moderate
Learning Objective: LO 5

72. Annual demand for a product is 40,000 units. The product is used at a constant rate
over the 365 days the company is open every year. The annual holding cost for the
product is estimated to be $2.50 per unit and the cost of placing each order is $125.00. If
the company orders according to the economic order quantity (EOQ) formula then its
total annual inventory cost for this product is
a. $100,000.
b. $50,000.
c. $5,000.
d. $2,500.
Ans: C
Difficulty: Moderate
Learning Objective: LO 5

73. Annual demand for a product is 40,000 units. The product is used at a constant rate
over the 365 days the company is open every year. The annual holding cost for the
product is estimated to be $2.50 per unit and the cost of placing each order is $125.00. If
the company orders according to the economic order quantity (EOQ) formula, then its
average inventory level for this product is
a. 20,000 units.
b. 10,000 units.
c. 2,500 units.
d. 1,000 units.
Ans: D
Difficulty: Moderate
Learning Objective: LO 5

74. Which of the following is not an assumption of the EOQ model?

a. demand is known and constant
b. no shortages allowed
c. lead time is determined by quantity ordered
d. order quantity is received all at once
Ans: C
Difficulty: Moderate
Learning Objective: LO 5

75. The economic order quantity is most widely used for determining how much to order
in
a. a periodic inventory system.
b. a continuous inventory system.
c. an on-demand inventory system.
d. None of these answer choices is correct.
Ans: B
Difficulty: Moderate
Learning Objective: LO 5

76. The quantity discount model considers

a. purchase price.
b. carrying cost.
c. ordering cost.
d. All of these answer choices are correct.
Ans: D
Difficulty: Easy
Learning Objective: LO 5

77. Which of the following is not an assumption of the EOQ model?

a) demand rate is known and constant
b) shortages are allowed
c) lead time is constant
d) order quantity is received all at once
Ans: B
Difficulty: Moderate
Learning Objective: LO 5

78. From a supplier perspective the purpose of a quantity discount is to get the
customer to buy
a. more than the economic order quantity.
b. less than the economic order quantity.
c. the economic order quantity.
d. None of these answer choices is correct.
Ans: A
Difficulty: Easy

Learning Objective: LO 6
79. Consider a university that purchases replacement chairs for its classrooms. The
purchasing manager knows that the annual demand for replacement chairs is 500.
The pricing schedule is as follows:
Order Size Price
100-199 $130
200-499 $122
500+ $120

For the next nine problems, use the following Excel solution to this quantity discount
problem with constant carrying cost.
Carrying cost
= $ 15
Ordering
cost = $ 200
Annual
Demand = 500

Discount
Quantity Price Q Q Total Cost
100 $130 115.47 115.47 $ 66,732.05
200 $122 115.47 200.00 $ 63,000.00
500 $120 115.47 500.00 $ 63,950.00

80. What is the economic order quantity?

a. 100
b. 115.47
c. 200
d. 500
Ans: B
Difficulty: Moderate

Learning Objective: LO 6

81. What is the inventory ordering cost using the economic order quantity?
a. $200
b. $500
c. $866
d. $1,000
Ans: C
Difficulty: Moderate

Learning Objective: LO 6
82. What is the carrying cost using the economic order quantity?
a. $750
b. $866
c. $,1500
d. $3,750
Ans: C
Difficulty: Moderate

Learning Objective: LO 6

83. What is the annual purchase cost using the economic order quantity?
a. $60,000
b. $61,000
c. $65,000
d. None of these answer choices is correct.
Ans: C
Difficulty: Moderate

Learning Objective: LO 6

84. What is the discount order quantity using a purchase price of $130?
a. 100
b. 115.47
c. 200
d. 500
Ans: B
Difficulty: Moderate

Learning Objective: LO 6

85. What is the discount order quantity using a purchase price of $122?
a. 100
b. 115.47
c. 200
d. 500
Ans: C
Difficulty: Moderate

Learning Objective: LO 6

86. What is the discount order quantity using a purchase price of $120?
a. 100
b. 115.47
c. 200
d. 500
Ans: D
Difficulty: Moderate

Learning Objective: LO 6
87. What is the optimal order quantity?
a. 100
b. 115.47
c. 200
d. 500
Ans: C
Difficulty: Moderate

Learning Objective: LO 6

88. What is the approximate minimum total cost associated with the optimal order
quantity?
a. $66,750
b. $66,732
c. $63,950
d. $63,000
Ans: D
Difficulty: Moderate

Learning Objective: LO 6

89. For a quantity discount problem, the order quantity selected is the one that minimizes
the total annual _________ cost.
a. inventory
b. carrying
c. ordering
d. purchase
Ans: A
Difficulty: Easy

Learning Objective: LO 6

90. The demand for an electronic component is normally distributed with an average
daily demand of 500 units and a standard deviation of 50. The lead-time for the
component is 9 days. If a service level of 95% is desired then the company’s reorder
point for this component is approximately
a. 3,785 units.
b. 4,500 units.
c. 4,627units.
d. 4,747units.
Ans: D
Difficulty: Moderate

Learning Objective: LO 7

91. The demand for an electronic component is normally distributed with an average
daily demand of 500 units and a standard deviation of 50. The lead time for the
component is 9 days. If a service level of 95% is desired, then the company’s safety stock
for this component is approximately
a. 150 units.
b. 247 units.
c. 336 units.
d. 740 units.
Ans: B
Difficulty: Moderate
Learning Objective: LO 7

92. The demand for an electronic component is normally distributed with an average
daily demand of 500 units, and a standard deviation of 50. The lead time for the
component is 9 days. If the company sets a reorder point of 4,650 for this component then
its service level is approximately
a. 50 percent.
b. 84 percent.
c. 92 percent.
d. 98 percent.
Ans: B
Difficulty: Moderate

Learning Objective: LO 7

93. 91.
93. A product’s usage is normally distributed with a weekly average demand of 2,000
units and a weekly standard deviation of 125. The lead time for the product is 4 weeks. If
the company would like to have a service level of 90% for this product then the reorder
point is approximately
a. 8,320 units.
b. 9,218 units.
c. 10,134 units.
d. 11,244 units.
Ans: a
Difficulty: Moderate
Learning Objective: LO 7

92. 94. A product’s usage is normally distributed with a weekly average demand of 2,000
units and a weekly standard deviation of 125. The product’s lead time is 4 weeks.
Currently, the reorder point for this product is 8,200. If the company would like to have a
service level of 95% for this product then
a. it must decrease its safety stock by approximately 412 units.
b. it must decrease its safety stock by approximately 212 units.
c. it must increase its safety stock by approximately 412 units.
d. it must increase its safety stock by approximately 212 units.
Ans: D
Difficulty: Moderate

Learning Objective: LO 7