INVENTORY AND PURCHASING

Mid-term Revision
Inventory Management Third year Inside FCES

Chapter 1
Supplier Evaluation Summary
1) Quality 𝑵𝒐. 𝒐𝒇 𝒂𝒄𝒄𝒆𝒑𝒕𝒆𝒅 𝒐𝒓𝒅𝒆𝒓𝒔
Quality level = × 𝟏𝟎𝟎
𝑻𝒐𝒕𝒂𝒍 𝑵𝒐. 𝒐𝒇 𝒐𝒓𝒅𝒆𝒓𝒔

2) Price 𝐥𝐨𝐰𝐞𝐬𝐭 𝐩𝐫𝐢𝐜𝐞 𝐭𝐡𝐞 𝐜𝐨𝐦𝐩𝐚𝐧𝐲 𝐮𝐬𝐞𝐝

𝐏𝐫𝐢𝐜𝐞 𝐥𝐞𝐯𝐞𝐥 = × 𝟏𝟎𝟎
𝐒𝐮𝐩𝐩𝐥𝐢𝐞𝐫 ′ 𝐬 𝐜𝐮𝐫𝐫𝐞𝐧𝐭 𝐩𝐫𝐢𝐜𝐞

3) Service 𝐍𝐨. 𝐨𝐟 𝐨𝐫𝐝𝐞𝐫𝐬 𝐬𝐮𝐩𝐩𝐥𝐢𝐞𝐝 𝐨𝐧 𝐭𝐢𝐦𝐞

𝐒𝐞𝐫𝐯𝐢𝐜𝐞𝐬 = × 𝟏𝟎𝟎
𝐭𝐨𝐭𝐚𝐥 𝐍𝐨. 𝐨𝐟 𝐨𝐫𝐝𝐞𝐫𝐬

• Multiply the calculated percent of each item by the predetermined

weight.
• Calculate the total points (Quality, Price, Service) which represents
the score of the supplier.
• The best supplier is the one who gets the highest score

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 Inventory Management Third year Inside FCES

Chapter 1
Supplier Evaluation
Exercise 1:
Sony company deals with three suppliers according to the following information:

Supplier No. of accepted No. of rejected No. of orders Price per unit
orders orders delivered on time

A 52 8 40 0.80
B 55 10 50 0.90
C 47 3 30 0.93
The weight of quality is 30 and the weight of service is 40.

1) The score of service for supplier A will equal:

a) 26.7
b) 30.8
c) 24
d) 26

2) The Score of price for supplier B will equal:

a) 30
b) 26
c) 26.7
d) 25.8

3) The score of quality for supplier C will equal:

a) 28.2
b) 25.4
c) 26
d) 24

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 Inventory Management Third year Inside FCES

4) The total score for supplier B is:

a) 82.9
b) 78
c) 82.7
d) None of the above

5) If the firm rejects the suppliers that get less than 80 points, which one will be rejected:
a) Supplier A
b) Supplier B
c) Supplier C
d) Both A and B

Exercise 2
Nokia Company deals with three suppliers, information about the three suppliers are as
follows:

Supplier % of rejected No. of delayed Price per unit

orders orders

A 7.5 % 3 1.5
B 10% 5 2
C 14% 15 1.75

The lowest price that the company deals with throughout the year was $1.
The company will reduce 2% from the total score of service for each order delayed.
The weight of quality is 25and the weight of service is 45.

1) The score of price for supplier A is :

a) 20
b) 30
c) 23.1
d) 42.3

2) The score of quality for supplier B is:

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 Inventory Management Third year Inside FCES

a) 2.5
b) 22.5
c) 40.5
d) 15

3) The Total Score for Supplier B is:

a) 22
b) 29.5
c) 85.5
d) 78

4) The score of service for supplier C is:

a) 6.3
b) 13.5
c) 31.5
d) 21.5

5) which supplier is the best one:

a) supplier A
b) Supplier B
c) Supplier C
d) None of the above

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 Inventory Management Third year Inside FCES

Exercise 3
XYZ Company deals with four suppliers, information about the four suppliers are as follows:

Supplier (A) delayed in delivering 16 orders, 7.5% from the total number of orders have been rejected
and the price level for supplier A was 95%

Supplier (B) delayed in delivering 20 orders from 40 orders and one order only from the total number
of orders that have been supplied was rejected. The price per unit for supplier B was $5

Regarding supplier (C) there was no delay in delivering the orders and from 30 orders 15 orders have
been rejected. The price per unit for supplier C was $5.4

Finally, supplier (D) delayed in delivering 4 orders from 40 orders and no orders have been rejected.
The price per unit for supplier D was $5.5

The lowest price that the company deals with throughout the year was $5 per unit. The weight of

quality is 50, the weight of price is 25, and the weight of service is 25. The company will reduce

5% from the total service score for any order delivered late.

Based on the previous information, answer the following questions:

1) The score of quality for supplier A is:

a) 5
b) 3.75
c) 46.3
d) 20

2) The score of service for supplier B is:

a) 12.5
b) 25
c) Zero
d) 48.8

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 Inventory Management Third year Inside FCES

3) The score of price for supplier C is:

a) 25
b) 22.7
c) 23.1
d) 23.8

4) The total score for supplier D is:

a) 92.7
b) 78.7
c) 87.35
d) 70

5) Which supplier is the best one:

a) Supplier A
b) Supplier B
c) Supplier C
d) Supplier D

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Inventory Management Third year Inside FCES

Chapter 2
Inventory Management Summary

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Inventory Management Third year Inside FCES

Chapter 2
Inventory Management
True or False Questions:

1. EOQ inventory models are basically concerned with the timing of orders.
(FALSE)
2. The average inventory level is inversely related to order size.
(FALSE)
3. The average inventory level and the number of orders per year are inversely
related: As one increases, the other decreases.
(TRUE)
4. The EOQ should be regarded as an approximate quantity rather than an exact
quantity. Thus, rounding the calculated value is acceptable.
(TRUE)
5. 20. Carrying cost is a function of order size; the larger the order, the higher the
inventory carrying cost.
(TRUE)
6. 21. Understocking an inventory item is a sure sign of inadequate inventory
control.
(FALSE)
7. Annual ordering cost is inversely related to order size.
(TRUE)
8. The total cost curve is relatively flat near the EOQ.
(TRUE)
9. Because price isn't a factor in the EOQ formula, quantity discounts won't affect
EOQ calculations.
(FALSE)
10.In the quantity discount model, if holding costs are given as a percentage of unit
price, a graph of the total cost curves will have the same EOQ for each curve.
(FALSE)

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Inventory Management Third year Inside FCES

11.In the quantity discount model, the optimum quantity will always be found on
the lowest total cost curve.
(FALSE)
12.The basic EOQ model ignores the purchasing cost.
(TRUE)
13.It is critical that the exact quantity calculated in the EOQ model be ordered.
(FALSE)
14.Using the EOQ model, the higher an item's carrying costs, the more frequently
it will be ordered.
(TRUE)
15.The cost of placing an order is a function of order size.
(FALSE)
16.In the basic EOQ model, annual holding cost is one-half of the total annual cost
for all items purchased.
(FALSE)
17.Quantity discounts are generally given for large number of orders.
(FALSE)
18.The larger the number of orders placed, the larger the average level of
inventory.
(FALSE)

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Inventory Management Third year Inside FCES

Multiple Choices Questions

1. Which of the following is not one of the assumptions of the basic EOQ model?
A. Annual demand requirements are known and constant.
B. Lead time does not vary.
C. Each order is received in a single delivery.
D. Quantity discounts are available.
E. All of the above are necessary assumptions.

2. A non-linear cost related to order size is the cost of:

A. interest
B. insurance
C. taxes
D. receiving
E. space

3. When carrying costs are stated as a percentage of unit price, the minimum points
on the total cost curves:
A. Line up
B. Equal zero
C. Do not line up
D. Cannot be calculated
E. Depend on the percentage assigned

4. Dairy items, fresh fruit and newspapers are items that:

A. do not require safety stocks
B. cannot be ordered in large quantities
C. are subject to deterioration and spoilage
D. require that prices be lowered every two days
E. have minimal holding costs

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Inventory Management Third year Inside FCES

5. Which of the following is least likely to be included in order costs?

A. processing vendor invoices for payment
B. moving delivered goods to temporary storage
C. inspecting incoming goods for quantity
D. taking an inventory to determine how much is needed
E. temporary storage of delivered goods

6. The EOQ model is most relevant for which one of the following?
A. ordering items with dependent demand
B. determination of safety stock
C. ordering perishable items
D. determining fixed interval order quantities
E. determining fixed order quantities

7. Which is not a true assumption in the EOQ model?

A. Production rate is constant
B. Lead time doesn't vary
C. No more than 3 items are involved
D. Usage rate is constant
E. No quantity discounts

8. In the basic EOQ model, if annual demand doubles, the effect on the EOQ is:
A. It doubles.
B. It is four times its previous amount.
C. It is half its previous amount.
D. It is about 70 percent of its previous amount.
E. It increases by about 40 percent.

9. In the basic EOQ model, if lead time increases from five to 10 days, the EOQ
will:
A. double
B. increase, but not double
C. decrease by a factor of two
D. remain the same
E. none of the above

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Inventory Management Third year Inside FCES

10. In the basic EOQ model, an annual demand of 40 units, an ordering cost of $5,
and a holding cost of $1 per unit per year will result in an EOQ of:
A. 20
B. square root of 200
C. 200
D. 400
E. none of these

11. In the basic EOQ model, if D = 60 per month, S = $12, and H = $10 per unit
per month, EOQ is:
A. 10
B. 12
C. 24
D. 72
E. 144

12. In the basic EOQ model, if annual demand is 50, carrying cost is $2, and
ordering cost is $15, EOQ is approximately:
A. 11
B. 20
C. 24
D. 28
E. 375

13. Which of the following is not true for Economic Production Quantity model?
A. Usage rate is constant.
B. Production rate exceeds usage rate.
C. Run size exceeds maximum inventory.
D. There are no ordering or setup costs.
E. Average inventory is one-half maximum inventory.

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Inventory Management Third year Inside FCES

14. Given the same demand, setup/ordering costs, and carrying costs, the EOQ
calculated using incremental replenishment will be ____________ if instantaneous
replenishment was assumed:
A. greater than the EOQ
B. equal to the EOQ
C. smaller than the EOQ
D. greater than or equal to the EOQ
E. smaller than or equal to the EOQ

15. The introduction of quantity discounts will cause the optimum order quantity to
be:
A. smaller
B. unchanged
C. greater
D. smaller or unchanged
E. unchanged or greater

16. In the quantity discount model, with carrying cost stated as a percentage of unit
purchase price, in order for the EOQ of the lowest curve to be optimum, it must:
A. have the lowest total cost
B. be in a feasible range
C. be to the left of the price break quantity for that price
D. have the largest quantity compared to other EOQ's
E. none of the above

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Inventory Management Third year Inside FCES

17. A car rental agency uses 96 boxes of staples a year. The boxes cost $4 each. It
costs $10 to order staples, and carrying costs are $0.80 per box on an annual basis.
Determine:
(A) the order quantity that will minimize the sum of ordering and holding boxes of
staples
(B) the annual cost of ordering and carrying the boxes of staples

D = 96 boxes/year
S = $10
H = $.80 per box-year

18. A service garage uses 120 boxes of cleaning cloths a year. The boxes cost $6
each. Ordering cost is $3 and holding cost is 10 percent of purchase cost per unit
on an annual basis.
Determine:
(A) The economic order quantity
(B) The total cost of carrying the cloths (excluding purchase price)
(C) The average inventory

D = 120 boxes per year

S = $3
H = .10($6) = $.60 per box-year

A)

B)

C)
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Inventory Management Third year Inside FCES

19. A shop that makes candles offers a scented candle, which has a monthly
demand of 360 boxes. Candles can be produced at a rate of 36 boxes per day. The
shop operates 20 days a month. Assume that demand is uniform throughout the
month. Setup cost is $60 for a run, and holding cost is $2 per box on a monthly
basis.
Determine the following:
(A) the economic run size
(B) the maximum inventory
(C) the number of days in a run

The daily usage rate (u) is 18 boxes. The daily production rate (p) is 36 boxes.

A)

B)

C)

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Inventory Management Third year Inside FCES

20. Estimated demand for gold-filled lockets at Sam's Bargain Jewelry and
Housewares is 2,420 lockets a year. Manager Veronica Winters has indicated that
ordering cost is $45, and that the following price schedule applies: 1 to 599 lockets,
$.90 each; 600 to 1,199 lockets, $.80 each; and 1,200 or more, $.75 each. What order
size will minimize total cost if carrying cost is $.18 per locket on an annual basis?

D = 2,420 lockets per year

S = $45
H = $.18 per locket

Hence, the most attractive order quantity is 1,200 units.

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Inventory Management Third year Inside FCES

21. Suppose that you are the manager of a production department that uses 400 boxes
of rivets per year. The supplier quotes you a price of $8.50 per box for an order size
of 199 boxes or less, a price of $8.00 per box for orders of 200 to 999 boxes, and a
price of $7.50 per box for an order of 1,000 or more boxes. You assign a holding
cost of 20 percent of the price to this inventory. What order quantity would you use
if the objective is to minimize total annual costs of holding, purchasing, and
ordering? Assume ordering cost is $80/order.

D = 400 boxes per year

S = $80
H = .20P

Thus, the best choice is to buy 200 per order at a price of $8.00 per unit.

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Inventory Management Third year Inside FCES

22. The operator of a concession at a downtown location estimates that he will sell
400 bags of circus peanuts during a month. Carrying costs are 17 percent of unit
price and ordering cost is $22. The price schedule for bags of peanuts is: 1 to 199,
$1.00 each; 200 to 499, $.94 each; and 500 or more $.87 each. What order size
would be most economical?

D = 400 bags per year

S = $22
H = .17P

Thus, the best choice is to buy 500 per order at a price of $.87 per unit.

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Inventory Management Third year Inside FCES

23. A company can produce a part it uses in an assembly operation at the rate of 50
an hour. The company operates eight hours a day, 300 days a year. Daily usage of
the part is 300 parts. The company uses the part every day. The run size is 6,000
parts. The annual holding cost is $2 per unit, and setup cost is $100.

A. How many runs per year will there be?

B. While production is occurring, how many parts per day are being added to
inventory?
C. Assuming that production begins when there are no parts on hand, what is the
maximum number of parts in inventory?
D. The machine is dedicated to this product. Every so often, preventive
maintenance, which requires six working days, must be performed on it. Does
this interrupt production cycles, or is there enough time between cycles to
perform the maintenance? Explain.

Answer:

A. Annual demand = (300 parts/day) x (300 days/yr.) = 90,000 parts/yr.

Annual demand/Run quantity = 90000/6000 = 15 runs/yr.
B. Inventory buildup = p - u = 400 - 300 = 100 parts/day.
C. Production takes 15 days: 6000 parts/400 parts/day = 15 days.
Buildup is 100 parts/day x 15 days = 1500 parts.
D. Usage is 300 parts/day for 6 days = 1800 parts, but maximum inventory is
only 1500 parts.

Yes, it would interrupt production.

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Inventory Management Third year Inside FCES

A manager has just received a revised price schedule from a vendor. What order
quantity should the manager use in order to minimize total costs? Annual Demand
is 120 units, ordering cost is $8, and annual carrying cost is $1 per unit.

Because this is in the 40-59 range, compare TC of Q = 44 @ $13, Q = 60 @ $12,

and Q = 90 @ $11:

24. Compared to the EOQ, the economic production quantity would be

approximately:
A. the same
B. 20 percent larger
C. 40 percent larger
D. 20 percent smaller
E. 40 percent smaller

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Inventory Management Third year Inside FCES

25. Compared to the EOQ, the maximum inventory would be approximately:

A. 70 percent higher
B. 30 percent higher
C. the same
D. 30 percent lower
E. 70 percent lower

The manager of the Quick Stop Corner Convenience Store (which never closes)
sells four cases of Stein beer each day. Order costs are $8.00 per order, and Stein
beer costs $.80 per six-pack (each case of Stein beer contains four six-packs).
Orders arrive three days from the time they are placed. Daily holding costs are
equal to five percent of the cost of the beer.

26. At what point should he reorder Stein beer?

A. 0 cases remaining
B. 4 cases remaining
C. 12 cases remaining
D. 16 cases remaining
E. 20 cases remaining

27. If he were to order 16 cases of Stein beer at a time, what would be the length of
an order cycle?
A. 0.25 days
B. 3 days
C. 1 day
D. 4 days
E. 20 days

28. If he were to order 16 cases of Stein beer at a time, what would be the average
inventory level?
A. 4 cases
B. 12 cases
C. 8 cases
D. 20 cases
E. 16 cases

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Inventory Management Third year Inside FCES

29. If he were to order 16 cases of Stein beer at a time, what would be the daily
total inventory costs, EXCLUDING the cost of the beer?
A. $2.00
B. $4.00
C. $1.28
D. $3.28
E. $2.56
30. What is the economic order quantity for Stein beer?
A. 8 cases
B. 11 cases
C. 14 cases
D. 20 cases
E. 32 cases

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Inventory Management Third year Inside FCES

Ann Chovies, owner of the Perfect Pasta Pizza Parlor, uses 20 pounds of pepperoni
each day in preparing pizzas. Order costs for pepperoni are $10.00 per order, and
carrying costs are 4 cents per pound per day. Lead time for each order is 3 days,
and the pepperoni itself costs $3.00 per pound.

31. At what point should she reorder pepperoni?

A. 20 pounds remaining
B. 40 pounds remaining
C. 60 pounds remaining
D. 80 pounds remaining
E. 100 pounds remaining

32. If she were to order 80 pounds of pepperoni at a time, what would be the length
of an order cycle?
A. 0 days
B. 0.25 days
C. 3 days
D. 4 days
E. 5 days

33. If she were to order 80 pounds of pepperoni at a time, what would be the
average inventory level?
A. 20 pounds
B. 40 pounds
C. 60 pounds
D. 80 pounds
E. 100 pounds
34. If she were to order 80 pounds of pepperoni at a time, what would be the total
daily costs, including the cost of the pepperoni?
A. $60.00
B. $63.20
C. $64.00
D. $64.10
E. $65.00

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Inventory Management Third year Inside FCES

35. What is the economic order quantity for pepperoni?

A. 20 pounds
B. 40 pounds
C. 60 pounds
D. 80 pounds
E. 100 pound
Given the following data for a particular inventory item:

36. What is the economic order quantity for this item? 2,000 units
37. For the economic order quantity, what is the length of an order cycle? 4 weeks
38. For the economic order quantity, what is the reorder point? 1,500 units
39. For the economic order quantity, what is the average inventory level? 1,000
units40. For the economic order quantity, what are average weekly ordering
costs? $10
41. For the economic order quantity, what are average weekly carrying costs? $10
42. For the economic order quantity, what are average weekly total costs, including
the cost of the inventory item? $270

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 Inventory Management Third year Inside FCES

A chemical firm produces sodium bi-sulfate. Demand for this product is 20 tons per day. The capacity
for producing the product is 50 tons per day. Setup costs $100, and storage and handling costs are $5
per ton a day. The firm operates 200 days a year.
1) The optimal run size will equal to:
a) 400
b) 516.4
c) 25.8
d) 600

2) Average of inventory will equal to:

a) 154.9
b) 309.8
c) 774.6
d) 387

3) What is the length of run:

a) 10.3 days
b) 25.82 days
c) 7.74 days
d) 8 days

4) What are the number of runs:

a) 8
b) 11
c) 7.7
d) 10

5) How much could the company save annually if the setup cost could be reduced to $25
per run?
a) 580.9
b) 775
c) 310.2
d) 1162.2

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 Inventory Management Third year Inside FCES

Exercise 2:
Item D S H P

A 7200 100 1.6 50

B 3600 120 2 40

C 12600 200 1.2 45

D 14400 300 3 60

1) The number of batches for each product will equal to:

a) 6.5
b) 4.6
c) 6.7
d) 9.5

2) The optimal production quantity for product C is:

a) 2739.1
b) 1938.5
c) 1880.5
d) 1326.3

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