Operations Management Processes and Supply Chains 11th Edition Krajewski Test Bank Full Download

Operations Management Processes and Supply Chains 11th Edition Krajewski Test Bank
Operations Management Processes and Supply

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Operations Management, 11e (Krajewski et al.)
Chapter 9: Inventory Management
9.1 Inventory Trade-Offs
1) A quantity discount is attractive because there is a drop in the price per unit when the order is
sufficiently large.
Answer: TRUE
Reference: Inventory Reduction Tactics
Difficulty: Moderate
Keywords: quantity discount
Learning Outcome: Compare the advantages and disadvantages of common inventory systems
AACSB: Application of Knowledge
2) Inventory management is the planning and controlling of inventories in order to meet the
competitive priorities of the organization.
Answer: TRUE
Reference: Inventory Trade-Offs
Difficulty: Easy
Keywords: inventory management, planning, controlling
3) When looking at inventory management, the term "lot size" refers to the physical dimensions
of the area where the inventory is stored.
Answer: FALSE
Difficulty: Easy
Keywords: inventory management, lot size
4) When looking at inventory management, the term "lot size" refers to the quantity of an
inventory item management either buys from a supplier or manufactures using internal
processes.
Answer: TRUE
Difficulty: Easy
Keywords: inventory management, lot size, buys, manufactures
1
Copyright © 2016 Pearson Education, Inc.
5) The primary reason for keeping inventories low is that inventory represents a temporary
monetary investment.
Answer: TRUE
Difficulty: Easy
Keywords: inventory, investment
6) One component of the holding cost of inventory is interest.

Answer: TRUE
Keywords: holding cost, inventory, interest
7) One component of the ordering cost of inventory is shrinkage.

Answer: FALSE
Keywords: ordering cost, shrinkage
8) A stockout occurs when an item that is typically stocked is not available to satisfy a demand
the moment it occurs.
Answer: TRUE
Keywords: stockout
9) A backorder occurs when a customer order cannot be filled when it is placed, but is instead
filled later.
Answer: TRUE
Keywords: backorder, fill
2
10) Setup cost is independent of order size.
Answer: TRUE
Keywords: setup cost
11) Reducing setup costs will increase the pressure to keep large inventories.
Answer: FALSE
Keywords: setup cost
12) Increasing inventory levels can sometimes help a firm reduce both its inbound and outbound
transportation costs.
Answer: TRUE
Keywords: pressure for large inventories
13) The term lot size signifies:

A) the total production of a single SKU for a one-year period.
B) the physical dimensions of the raw materials used to make a batch of one SKU.
C) the dimensions of the container used to ship an order to any location outside of company
property.
D) the number of units of a single item that a company buys from a supplier.
Answer: D
Difficulty: Easy
Keywords: lot size
3
14) Which of the following generates pressure to increase inventories?
A) inventory holding costs
B) ordering costs
C) storage and handling costs
D) taxes and insurance
Answer: B
Difficulty: Easy
Keywords: pressures for small / large inventories
15) Which of the following generates pressure to decrease inventories?

A) inventory shrinkage costs
B) backorders and stockouts
C) transportation costs
D) quantity discounts
Answer: A
Difficulty: Easy
16) Which of the following does NOT generate pressure to decrease inventories?
A) taxes and insurance
B) inventory holding costs
C) storage and handling costs
D) ordering costs
Answer: D
17) Which of the following does NOT generate pressure to increase inventories?
A) transportation costs
B) backorders and stockouts
C) inventory shrinkage costs
D) quantity discounts
Answer: C
4
18) ________ is the planning and controlling of inventories in order to meet the competitive
priorities of the organization.
Answer: Inventory management
Difficulty: Easy
Keywords: inventory management
19) The term ________ refers to the quantity of an item that is purchased from a supplier; the
term ________ is used to refer to the size of the batch that is produced using internal processes.
Answer: lot size, lot size
Difficulty: Hard
Keywords: lot size
20) ________ is the opportunity cost of investing in an asset relative to the expected return on
assets of similar risk.
Answer: Cost of capital
Keywords: cost of capital, opportunity, return on assets
21) Inventory ________ cost is the variable cost of keeping items on hand, such as storage and
handling, taxes, insurance, and shrinkage.
Answer: holding
Keywords: holding cost, interest, storage, handling, tax
22) ________ occurs when inventory is stolen by employees and customers or when the
inventory cannot be sold at full value owing to model changes or low demand.
Answer: Shrinkage
Keywords: shrinkage, pilferage, obsolescence
5
23) A(n) ________ is an order that cannot be satisfied, resulting in the loss of a sale.
Answer: stockout
Keywords: inventory, pressure for large inventories, customer service
24) A(n) ________ occurs when a customer order cannot be filled as promised or demanded but
is filled later.
Answer: backorder
Keywords: backorder, order
25) ________ is the cost of preparing a purchase order for a supplier or a production order for
manufacturing.
Answer: Ordering cost
Keywords: ordering cost
26) What are the components of holding cost?

Answer: The components of holding cost include cost of capital, storage and handling cost,
taxes, insurance, and shrinkage.
Keywords: holding cost
6
27) Although lower inventories and a just-in-time approach receive considerable attention in the
business media, some organizations prefer high levels of inventory. Why would they want to
hold a large inventory?
Answer: In the retail sector, some firms target a high level of inventory due to customer service
considerations. If an item is in stock, then the customer can rely on finding it whenever they
decide to place an order. If a customer values one-stop shopping, it may make sense to have high
levels of inventory just to keep customers within the store. Some items are critical; a stockout
may result in considerable inconvenience or a threat to safety and well-being. To the producer, a
high cost of placing an order or high setup or transportation cost may provide motivation for a
large stock of materials. A large inventory will improve labor and equipment utilization and will
also help producers take advantage of quantity discounts.
Keywords: inventory
9.2 Types of Inventory
1) Dependent demand items are those items for which demand is influenced by market
conditions and is not related to inventory decisions for any other item held in stock.
Answer: FALSE
Reference: Types of Inventory
Keywords: dependent demand, inventory
2) An experienced operations manager can tell at a glance whether an item should be classified
as safety stock, anticipation inventory, or cycle stock.
Answer: FALSE
Difficulty: Easy
Keywords: safety stock
3) Independent-demand items are those items for which demand is influenced by market
conditions and is not related to inventory decisions for any other items held in stock.
Answer: TRUE
Keywords: independent demand, inventory
7
4) Inventories needed for the production of services and goods (inputs to a firm's transformation
processes) are called:
A) quarantined materials.
B) work-in-process.
C) raw materials.
D) finished goods.
Answer: C
Difficulty: Easy
Keywords: types of inventories
5) Items, such as components or assemblies, needed to manufacture a final product are called:
B) work-in-process.
C) raw materials.
D) finished goods.
Answer: B
Difficulty: Easy
6) Items sold to a firm's customers are called:

B) work-in-process.
C) raw materials.
D) finished goods.
Answer: D
Difficulty: Easy
8
7) Which of these statements about pipeline inventory is BEST?
A) Shorter lead times create more pipeline inventory.
B) Changing an item's lot size does not directly affect the average level of the pipeline inventory.
C) Pipeline inventory exists to avoid customer service problems.
D) Pipeline inventory is used to even out volatile fluctuations in supply or demand.
Answer: B
Keywords: pipeline inventory, lever
Scenario 9.1
Shipments of Product A from a distribution center to a retailer are made in lots of 350. The
retailer's average demand for Product A is 75 units per week. The lead time from distributor to
retailer is 3 weeks. The retailer pays for the shipments when they leave the distributor. The
distributor has agreed to reduce the lead time to 2 weeks if the retailer will purchase quantities of
400 per shipment instead of 350 units per shipment.
8) Refer to Scenario 9.1. With the change in purchased quantities, the average cycle inventory
will:
A) decrease by 75 units.
B) increase by 50 units.
C) decrease by 25 units.
D) increase by 25 units.
Answer: D
Keywords: types of inventories, cycle inventory, pipeline inventory
AACSB: Analytical Thinking
9) Refer to Scenario 9.1. With the change in lead time, the pipeline inventory will:
A) decrease by 75 units.
B) increase by 50 units.
C) decrease by 25 units.
D) increase by 25 units.
Answer: A
9
10) Refer to Scenario 9.1. The net impact on the retailer will be:
A) no net change in average cycle and pipeline inventories.
B) a net average increase in cycle and pipeline inventories of 50 units.
C) a net average decrease in cycle and pipeline inventories of 75 units.
D) a net average decrease in cycle and pipeline inventories of 50 units.
Answer: D
Scenario 9.2
Shipments of Product X from a plant to a wholesaler are made in lots of 600. The wholesaler's
average demand for X is 100 units per week. The lead time from the plant to the wholesaler is 4
weeks. The wholesaler pays for the shipments when they leave the plant.
11) Refer to Scenario 9.2. What is the total of the wholesaler's current cycle plus pipeline
inventories?
A) 300 units
B) 100 units
C) 700 units
D) 400 units
Answer: C
12) Refer to Scenario 9.2. If the plant reduces its lead time from 4 to 2 weeks and keeps its 600
unit lot size, what is the wholesaler's new total cycle plus pipeline inventories?
A) 300 units
B) 500 units
C) 700 units
D) 200 units
Answer: B
10
13) Refer to Scenario 9.2. If the plant reduces its shipment lot size from 600 to 400 units and
keeps its 4 week lead time, what is the wholesaler's new total cycle plus pipeline inventories?
A) 600 units
B) 300 units
C) 500 units
D) 400 units
Answer: A
14) Refer to Scenario 9.2. Which of the following situations results in the wholesaler's total cycle
plus pipeline inventories amounting to 550 units?
A) The plant shipment lot size of 400 and plant-to-wholesaler lead time of 2 weeks
B) The plant shipment lot size of 500 and plant-to-wholesaler lead time of 3 weeks
C) The plant shipment lot size of 400 and plant-to-wholesaler lead time of 3 weeks
D) The plant shipment lot size of 600 and plant-to-wholesaler lead time of 4 weeks
Answer: B
15) Refer to Scenario 9.2. Which of the following situations results in the wholesaler's total cycle
plus pipeline inventories amounting to 400 units?
A) The plant shipment lot size of 500 and plant-to-wholesaler lead time of 3 weeks
B) The plant shipment lot size of 400 and plant-to-wholesaler lead time of 3 weeks
C) The plant shipment lot size of 600 and plant-to-wholesaler lead time of 4 weeks
D) The plant shipment lot size of 400 and plant-to-wholesaler lead time of 2 weeks
Answer: D
16) ________ are inventories needed for the production of goods and services; they are
considered to be the inputs to the transformation process.
Answer: Raw materials
Keywords: inventory types, raw materials
11
17) ________ consists of items such as components or assemblies needed for a final product in
manufacturing.
Answer: Work-in-process (WIP)
Keywords: inventory types, WIP, work-in-process inventory
18) ________ inventory is the portion of total inventory that varies directly with lot size.
Answer: Cycle
Keywords: cycle, lot size
19) The ________ determines the frequency and quantity to order.

Answer: lot size
Keywords: lot size
20) ________ inventory is the surplus inventory that a company holds to protect against
uncertainties in demand, lead-time, and supply.
Answer: Safety stock
Keywords: safety stock
21) As safety stock increases, the holding cost of that inventory item ________.
Answer: increases
Keywords: safety stock, holding cost
12
22) ________ inventory is the inventory moving from point to point in the materials flow
system.
Answer: Pipeline
Keywords: pipeline, point flow
23) When considering dependent / independent demand, in the example of tires and automobiles,
the original equipment tires represent ________-demand items, while automobiles represent a(n)
________-demand item.
Answer: dependent, independent
Difficulty: Easy
Keywords: independent demand
24) What are the three types of inventory? For which inventory type is a stockout most critical?
Answer: The types of inventory discussed in the text are raw materials, work-in-process, and
finished goods. Answers may vary as to the most critical stockout.
Keywords: cycle inventory, lever
25) What are the types of inventory from the perspective of how it is created? Where is each type
most likely to exist in the supply chain?
Answer: Inventory takes four forms from this perspective; cycle, safety stock, anticipation, and
pipeline. Pipeline inventory is in transit between points in the supply chain. The other types in
this classification scheme, anticipation inventory, safety stock, and cycle inventory could be
found at any point in the supply chain that has customers.
Keywords: cycle inventory, safety stock, anticipation inventory, pipeline
13
9.3 Inventory Reduction Tactics
1) Repeatability is an undesirable feature of some orders because they must be repeated until the
order is filled correctly.
Answer: FALSE
Keywords: repeatability
2) The primary lever to reduce anticipation inventory is to place orders closer to the time when
they must be received.
Answer: FALSE
Keywords: anticipation inventory, safety stock
3) Which of the following is NOT a lever for reducing cycle inventories?

A) place purchased item orders at fixed intervals
B) reduce lot sizes for items moving in the supply chain
C) streamline methods for placing orders and making machine set ups
D) increase repeatability to eliminate the need for changeovers
Answer: A
4) The manager at Crystal Mountain Ski Resort lowers the price of lift tickets to $2 during July
and August, a traditionally slow period for skiing. This secondary lever impacts:
A) safety stock inventory.
B) cycle inventory.
C) pipeline inventory.
D) anticipation inventory.
Answer: D
Keywords: anticipation inventory
14
5) Which of the following does not increase repeatability?
A) parts standardization
B) customization
C) group technology
D) flexible automation
Answer: B
Keywords: repeatability
6) One of the secondary levers for reducing pipeline inventory is to:

A) offer seasonal pricing plans.
B) increase capacity cushions.
C) accept only large orders.
D) select more responsive suppliers.
Answer: D
7) ________ are the basic tactics for reducing inventories in supply chains.
Answer: Levers
Keywords: inventory reduction tactics
8) A ________ lever is one that must be activated if inventory is to be reduced.

Answer: primary
Keywords: inventory reduction tactics
15
9) ________-demand items are items for which demand is influenced by market conditions and
is not related to the inventory decisions for any other item held in stock.
Answer: Independent
Keywords: independent demand
10) What are the secondary levers for cycle inventory?

Answer: The secondary levers for cycle inventory are streamlining methods for placing orders
and making setups, and increasing repeatability to eliminate the need for changeovers.
11) What are the secondary levers for safety stock inventory?
Answer: The secondary levers for safety stock inventory are improved demand forecasts, cutting
lead-time of purchased or produced items, reducing supply uncertainties, and relying more on
equipment and labor buffers.
Keywords: safety stock inventory, lever
12) What are the secondary levers for pipeline inventory?

Answer: The secondary levers for pipeline inventory are finding more responsive suppliers and
introducing new computer systems to overcome information delays and changing Q where lead-
time depends on lot size.
16
13) What are the key issues when implementing and operating an inventory control system?
Answer: The authors indicate that three important questions must be addressed when pondering
an inventory control system: What degree of control should we impose on an item?How much
should we order? and When should we place the order? Inventory control systems respond to the
last two questions. In selecting an inventory control system for a particular application, the
nature of the demands imposed on the inventory items is crucial.
Keywords: inventory
9.4 ABC Analysis
1) A stock-keeping unit (SKU) is an individual item or product that has an identifying code and
is held in inventory somewhere along the supply chain.
Answer: TRUE
Reference: ABC Analysis
Difficulty: Easy
Keywords: SKU, individual item, inventory, identifying code
2) A stock-keeping unit (SKU) is a specially designed container for holding a specific amount of
an inventory item somewhere along the supply chain.
Answer: FALSE
Difficulty: Easy
Keywords: SKU, inventory item, inventory, supply chain
3) ABC analysis is a process for categorizing SKUs according to dollar usage so that managers
can focus on items with the highest dollar value.
Answer: TRUE
Keywords: ABC analysis, dollar value
17
4) When using ABC analysis, class C SKUs should be reviewed frequently.
Answer: FALSE
Keywords: ABC analysis, class
5) Cycle counting is an inventory-control method whereby storeroom personnel physically count

a small percent of the total number of items each day.
Answer: TRUE
Keywords: cycle counting, physical count
Table 9.1
Inventory records show the following:
Series Unit Cost Count

Q $1751.34 6
R $462.00 22
S $88.44 63
T $382.73 14
U $96.42 24
V $38.04 51
W $34.23 17
6) Use Table 9.1 to ascertain the veracity of this statement. Items in series U are the most C-like
of all inventory SKUs.
Answer: TRUE
18
7) What is generally TRUE about class A SKUs in ABC analysis? They represent about:
A) 20 percent of all SKUs.
B) 30 percent of all SKUs.
C) 20 percent of the dollar usage.
D) 50 percent of the dollar usage.
Answer: A
Keywords: ABC analysis, class A
8) What is generally TRUE about class A SKUs in ABC analysis? They represent about:
Answer: D
Keywords: ABC analysis, class A
Table 9.1
Inventory records show the following:
Series Unit Cost Count

Q $1751.34 6
R $462.00 22
S $88.44 63
T $382.73 14
U $96.42 24
V $38.04 51
W $34.23 17
9) Use Table 9.1 to identify the best statement.

A) Items in series V and Q fall in the same category of an ABC analysis.
B) Items in series W and S fall in the same category of an ABC analysis.
C) Items in series W and Q fall in the same category of an ABC analysis.
D) Items in series S and V should be in the Class B of an ABC analysis.
Answer: C
19
10) What is generally TRUE about class B SKUs in ABC analysis? They represent about:
A) 20 percent of all SKUs and about 80 percent of the dollar usage.
B) 80 percent of all SKUs and about 20 percent of the dollar usage.
C) 30 percent of all SKUs and about 15 percent of the dollar usage.
D) 50 percent of all SKUs and about 95 percent of the dollar usage.
Answer: C
Keywords: ABC analysis, class B
11) What is generally TRUE about class C SKUs in ABC analysis? They represent about:
Answer: B
12) What is generally TRUE about class C SKUs in ABC analysis? They represent about:
Answer: C
Keywords: ABC analysis, Pareto, class C
20
13) ABC analysis is closely related to:
A) three-bin analysis.
B) EOQ analysis.
C) repeatability analysis.
D) Pareto analysis.
Answer: D
Keywords: ABC analysis, Pareto analysis
14) In ABC analysis, ________ SKUs represent the smallest number of SKUs but the greatest
dollar usage.
Answer: class A
Keywords: ABC, Pareto
15) In an ABC analysis, class ________ SKUs, which typically make up about ________ % of
the SKUs, account for about 80% of the dollar usage.
Answer: A, 20
16) In an ABC analysis, class ________ SKUs, which typically make up about ________ % of
the SKUs, account for only about 15% of the dollar usage.
Answer: B, 30
17) In an ABC analysis, class ________ SKUs, which typically make up ________ % of the
SKUs, account for only about 5% of the dollar usage.
Answer: C, 50
21
18) Inventory manager George Costanza knows too well that shrinkage occurs so he goes to the
stock room every day to do a spot check of a few pre-selected items, physically counting them to
verify that his count agrees with the number indicated by their computerized inventory system.
This method of inventory control is known as ________.
Answer: cycle counting
Keywords: cycle counting
19) What is ABC analysis and how does it work?

Answer: ABC analysis is a process of dividing SKUs into three classes according to their dollar
usage so that managers can focus on SKUs that have the highest dollar value. Class A SKUs
represent about 20% of the SKUs but account for 80% of the dollar usage. Class B SKUs
account for another 30% of the SKUs but only 15% of the dollar usage. Finally, 50% of all SKUs
fall in class C, representing only 5% of the dollar usage.
Keywords: ABC analysis, Pareto analysis
9.5 Economic Order Quantity
1) EOQ should be used if you use a make-to-order strategy and the customer specifies that the
entire order be delivered in one shipment.
Answer: FALSE
Reference: Economic Order Quantity
Difficulty: Easy
Keywords: EOQ, economic order quantity
2) EOQ should be used if you follow a make-to-stock strategy and the item has relatively stable
demand.
Answer: TRUE
Difficulty: Easy
22
3) The EOQ is the smallest lot size that a supplier will allow a customer to order.
Answer: FALSE
4) As the annual demand increases, the EOQ also increases.

Answer: TRUE
5) Considering the EOQ model, smaller lots are justified when holding costs are decreased.
Answer: FALSE
Keywords: EOQ, economic order quantity, holding cost, lot size
6) Considering the EOQ model, a reduction in ordering costs justifies reducing the lot size
ordered.
Answer: TRUE
Difficulty: Easy
Keywords: EOQ, economic order quantity, ordering cost, lot size
7) Which one of the following is NOT an assumption of the EOQ model?

A) Decisions for one item can be made independently of decisions made for other items.
B) There is no uncertainty in lead-time.
C) The amount of an order received is exactly equal to what was ordered, without any "short
shipments" from a supplier or scrap losses in the shop.
D) Quantity discounts can be taken advantage of for large lot sizes.
Answer: D
Keywords: EOQ, economic order quantity, assumptions
23
8) Which one of the following statements regarding the economic order quantity (EOQ) 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 for cycle inventory
exceeds the annual ordering cost.
C) The EOQ model assumes a variable demand pattern.
D) When the interest rate drops, the inventory holding cost decreases and the EOQ decreases.
Answer: B
Keywords: EOQ, economic order quantity, cycle inventory
9) Which one of the following statements concerning the economic order quantity (EOQ) model
is TRUE?
A) An increase in holding cost will increase the EOQ.
B) A decrease in demand will increase the EOQ.
C) A decrease in holding cost will increase the EOQ.
D) None of the above is true.
Answer: C
Keywords: EOQ, economic order quantity, holding cost
10) Which one of the following statements concerning the economic order quantity (EOQ) is
TRUE?
A) The EOQ is the order quantity that minimizes annual inventory holding costs.
B) An increase in demand will increase the EOQ.
C) The time between orders (TBO) will increase with an increase in holding costs.
D) The EOQ formula assumes that there are only three relevant costs: holding, transportation,
and setup.
Answer: B
Difficulty: Hard
24
11) You have taken a job in industry and are facing your first ordering decision. As you prepare
to place the order, you remember your instructor teaching you that you wouldn't use the EOQ
formula if:
A) you followed a make-to-stock strategy for an item with stable demand.
B) your carrying costs and ordering costs are known and relatively stable.
C) the order size is constrained by capacity limitations such as the number or size of the delivery
trucks.
D) your setup costs and holding costs remain constant and can be determined.
Answer: C
12) A company operating under an EOQ policy enjoys rising annual demand for their products
for three consecutive years. During this time their holding cost and ordering cost remain
constant. Which statement is BEST?
A) Their order quantity will fall and so will the time between orders.
B) Their order quantity will fall but the time between orders will rise.
C) Their order quantity will rise but the time between orders will fall.
D) Their order quantity will rise and so will the time between orders.
Answer: C
Keywords: EOQ, economic order quantity, time between orders
13) The Lemma Company manufactures and sells 10 products. Ways have been found to cut
both the setup and inventory holding costs in half. What effect will this have on the economic
order quantities of the 10 products?
A) They will be reduced by a factor of 1.41.
B) They will not change.
C) They will be reduced by a factor of 2.00.
D) They will be increased by a factor of 1.41.
Answer: B
Difficulty: Hard
Keywords: EOQ, economic order quantity, setup cost, holding cost
25
14) The Lemming Company implements an aggressive marketing campaign and effectively
doubles the annual demand for Model 13s. Their total annual holding cost should:
A) decrease by 50%.
B) increase by 100%.
C) stay the same.
D) increase by 40%.
Answer: A
Difficulty: Hard
Keywords: EOQ, economic order quantity, holding cost
15) Sensitivity analysis on the economic order quantity (EOQ) formula can help the operations
manager answer several questions on how to manage inventories. Which one of the following
questions is NOT answered by EOQ sensitivity analysis?
A) How critical are errors in estimating demand (D), inventory holding cost (H), and setup cost
(S)?
B) What should happen to lot sizes if interest rates drop?
C) What should happen to cycle inventory if the demand rate increases?
D) What should happen to lot sizes if supply and lead-time uncertainty increase?
Answer: D
Keywords: EOQ, economic order quantity, lead time, sensitivity analysis
16) Vilas County Hospital consumed 400 boxes of bandages per week last year. The price of
bandages was $80 per box, and the hospital operates 52 weeks per year. The cost of processing
an order was $64, and the cost of holding one box throughout a full year was 20% of the value of
the material.
Last year the hospital ordered bandages, on average, once every two weeks, each time ordering
800 boxes. What extra cost did the hospital incur that could have been avoided if the EOQ
concept had been applied?
A) less than or equal to $650
B) more than $650 and less than $1,050
C) more than $1,050 and less than $1,450
D) more than $1,450
Answer: D
Keywords: EOQ, economic order quantity, total cost
26
Scenario 9.3
The Talbot Company uses electrical assemblies to produce an array of small appliances. One of
its high cost / high volume assemblies, the XO-01, has an estimated annual demand of 8,000
units. Talbot estimates the cost to place an order is $50, and the holding cost for each assembly is
$20 per year. The company operates 250 days per year.
17) Use the information in Scenario 9.3. What is the economic order quantity for the XO-01?
A) less than or equal to 100 units
B) greater than 100 units but less than or equal to 180 units
C) greater than 180 units but less than or equal to 250 units
D) greater than 250 units
Answer: C
18) Use the information in Scenario 9.3. What is the annual inventory holding cost if Talbot
orders using the EOQ quantity?
A) less than or equal to $1,500
B) greater than $1,500 but less than or equal to $4,000
C) greater than $4,000 but less than or equal to $6,500
D) greater than $6,500
Answer: B
Keywords: EOQ, economic order quantity, inventory holding cost
19) Use the information in Scenario 9.3. What is the annual ordering cost if Talbot orders using
the EOQ quantity?
A) less than or equal to $1,000
D) greater than $4,000
Answer: B
27
20) Use the information in Scenario 9.3. What is the total annual holding and ordering costs if
Talbot orders using the EOQ quantity?
A) greater than $7,000
D) less than or equal to $2,500
Answer: C
Keywords: EOQ, economic order quantity, total inventory holding and ordering costs
21) Use the information in Scenario 9.3. What is the cycle length (time between orders) when
orders are placed using the EOQ quantity?
A) less than 5 days
B) greater than 5 days but less than or equal to 10 days
C) greater than 10 days but less than or equal to 15 days
D) greater than 15 days
Answer: B
Keywords: EOQ, economic order quantity, cycle length, time between orders
22) Use the information in Scenario 9.3. How many times per year must Talbot order the XO-01
when orders are placed using the EOQ quantity?
A) less than 10 times per year
B) greater than 10 times but less than or equal to 20 times per year
C) greater than 20 times but less than or equal to 30 times per year
D) greater than 30 times per year
Answer: D
Keywords: EOQ, economic order quantity, orders per year
28
23) Use the information in Scenario 9.3. The purchasing manager decides that, in order to save
purchasing time, orders for the XO-01 will be placed every three months, or four times per year.
How much does this approach cost Talbot in total annual holding and ordering costs (instead of
Talbot ordering using the EOQ quantity)?
D) less than or equal to $10,000
Answer: B
Scenario 9.4
The Mwongola Company is a small manufacturing company that uses gear assemblies to
produce four different models of mountain bikes. One of these gear assemblies, the "Smooth
Shifter", is used for the two most expensive of Burdell's four models, and has an estimated
annual demand of 300 units. Burdell estimates the cost to place an order is $40, and the holding
cost for each assembly is $60 per year. The company operates 250 days per year.
24) Use the information in Scenario 9.4. What is the economic order quantity for the Smooth
Shifter?
Answer: A
25) Use the information in Scenario 9.4. What is the annual inventory holding cost if Mwongloa
orders using the EOQ quantity?
B) greater than $300 but less than or equal to $500
C) greater than $500 but less than or equal to $700
D) greater than $700
Answer: C
29
26) Use the information in Scenario 9.4. What is the annual ordering costs if Mwongola orders
using the EOQ quantity?
Answer: D
Keywords: EOQ, economic order quantity, ordering cost
27) Use the information in Scenario 9.4. What is the total annual holding and ordering costs if
Mwongola orders using the EOQ quantity?
C) greater than $750 but less than or equal to $1,000
D) less than or equal to $750
Answer: B
28) Use the information in Scenario 9.4. What is the cycle length (time between orders) when
orders are placed using the EOQ quantity?
A) less than or equal to 5 days
B) greater than 5 days but less than or equal to 10 days
C) greater than 10 days but less than or equal to 15 days
D) greater than 15 days
Answer: D
Keywords: EOQ, economic order quantity, cycle length, TBO
30
29) Use the information in Scenario 9.4. How many times per year must Mwongola order the
Smooth Shifter when orders are placed using the EOQ quantity?
A) less than or equal to 10 times per year
B) more than 10 times but fewer than or equal to 20 times per year
C) more than 20 times but fewer than or equal to 30 times per year
D) more than 30 times per year
Answer: B
30) Use the information in Scenario 9.4. The purchasing manager decides that, in order to save
purchasing time, orders for the Smooth Shifter will be placed once a month, or twelve times per
year. How much does this approach cost Mwongola in additional annual holding and ordering
costs (instead of Mwongola ordering using the EOQ quantity)?
A) more than $500
B) more than $200 but less than or equal to $500
C) more than $50 but less than or equal to $200
D) less than or equal to $50
Answer: D
31
Scenario 9.5
Tom Bergman, owner and operator of the Earplug Superstore, is reviewing the costs associated
with the store's best-selling hearing aid, the BZ15. The data available to Dr. Bergman concerning
this device follow.
Demand = 25 units/week
Order cost = $3/order
Holding cost = $1.50/unit/year
The Earplug Superstore operates 52 weeks a year.
31) Use the information in Scenario 9.5. If Tom decides to order at the economic order quantity,
what is the sum of the annual ordering cost and holding cost?
Answer: C
32) Use the information in Scenario 9.5. Tom cuts the ordering cost in half by implementing a
streamlined processing system. How many fewer units should he now order each time he places
an order?
B) greater than 10 but less than or equal to 15 units
C) greater than 15 but less than or equal to 20 units
Answer: D
Keywords: EOQ, economic order quantity, ordering cost
32
33) Use the information in Scenario 9.5. If Tom orders a one-year supply at a time, how much
higher are his total (ordering and holding) costs compared to total costs incurred if he ordered at
his EOQ?
Answer: D
34) Use the information in Scenario 9.5. If Tom orders at the economic order quantity, how
many units does he order at a time?
Answer: A
35) Use the information in Scenario 9.5. If Tom orders such that his annual holding cost is twice
what his annual ordering cost is, how many units at a time is he ordering?
Answer: B
Difficulty: Hard
33
36) A neighborhood sportswear store sells a pair of Victoria sneakers for $40. Due to the recent
fitness craze, these shoes are in high demand: 50 pairs of shoes are sold per week. The ordering
cost is $20 per order, and the annual holding cost is 20% of the selling price. If the store operates
52 weeks a year, what can you say about the current lot size of 235?
A) too large
B) too small
C) just right
D) cannot tell from the information given
Answer: A
37) An item experiences an annual demand of 7,200 units. It costs $8 to hold an item in
inventory for one year and $16 to place an order. If the EOQ model is used, what is the time
between orders? Assume that there are 52 business weeks in a year.
A) less than 1 week
B) greater than 1 week but less than or equal to 2 weeks
C) greater than 2 weeks but less than or equal to 3 weeks
D) greater than 3 weeks
Answer: B
34
Scenario 9.6
Consider the following data for an independent-demand item maintained by Angie Bonpensiero,
the proprietor of a local auto repair shop:
Weekly demand = 50 units

Ordering cost = $8/order
Holding cost = $4/unit/year
Weeks in a year = 50
38) Use the information in Scenario 9.6. If Bonpensiero uses the EOQ model, how frequently
must she place orders for this item?
A) every week
B) every 2 weeks
C) every 3 weeks
D) every 4 weeks
Answer: B
39) Use the information in Scenario 9.6. Due to new ordering procedures initiated by
Bonpensiero, the ordering cost is drops to $4 per order. At the same time, the weekly demand
increases to 64 units per week due to an increase in business. What effect do these changes have
on the EOQ quantity for this item?
A) The EOQ quantity remains unchanged.
B) The EOQ quantity increases by 20%.
C) The EOQ quantity decreases by 20%.
D) Sufficient information is not available to answering this question.
Answer: C
35
Scenario 9.7
Cranium, Inc., purchases term papers from an overseas supplier under a continuous review
system. The average demand for a popular mode is 300 units a day with a standard deviation of
30 units a day. It costs $60 to process each order and there is a five-day lead-time. The holding
cost for a paper is $0.25 per year and the company policy is to maintain a 98% service level.
Cranium operates 200 days per year. A normal distribution table is appended to this exam.
40) Use the information in Scenario 9.7. What is the EOQ for these papers?
A) less than or equal to 3,000 units
B) greater than 3,000 units but less than or equal to 4,000 units
C) greater than 4,000 units but less than or equal to 5,000 units
D) greater than 5,000 units
Answer: D
Scenario 9.8
A company operating under a continuous review system has an average demand of 50 units per
week for the item it produces. The standard deviation in weekly demand is 20 units. The lead-
time for the item is six weeks, and it costs the company $30 to process each order. The holding
cost for each unit is $10 per year. The company operates 52 weeks per year. A normal
distribution table is appended to this exam.
41) Use the information in Scenario 9.8. What is the economic order quantity (EOQ) for this
item?
Answer: A
36
Scenario 9.9
"Gollee those cats sure go through a lot of food," Geoff exclaimed as he saw the shopping list
pad that had been pre-printed with the words "cat food" a the top. He pondered a different
approach to shopping for the furry little darlings, reviewed his shopping records, and discovered
the following. The price of cat food has held steady at 89 cents per can. Despite feigning
indifference, each of the seven cats nibbles their way through an average of one can per day,
three hundred sixty five days a year. The price of gasoline has held constant at $3.50 per gallon
and his pickup uses a gallon each way to the cat food store. The cost to hold a can of cat food is
10% of the unit price.
42) Using the information in Scenario 9.9 determine the economic order quantity for cat food.
A) 634 cans
B) 448 cans
C) 239 cans
D) 169 cans
Answer: A
43) Use the information in Scenario 9.9 to determine the average number of orders per year if
Geoff adopts an EOQ policy.
A) 3 orders per year
B) 4 orders per year
C) five orders per year
D) six orders per year
Answer: B
44) Use the information in Scenario 9.9 to determine the annual setup cost if Geoff follows an
EOQ policy to obtain cat food.
A) $112
B) $14
C) $28
D) $56
Answer: C
Keywords: EOQ, economic order quantity, ordering cost, lot size
37
45) Use the information in Scenario 9.9 to determine the combined cost of goods and inventory
policy if Geoff decides to follow the economic order quantity model?
A) $2415
B) $2218
C) $2274
D) $2330
Answer: D
46) Use the information in Scenario 9.9 to determine the amount of time in-between trips to the
cat food store if Geoff wisely elects to follow an EOQ policy for obtaining cat food.
A) about three months
B) about three weeks
C) about six months
D) about three days
Answer: A
47) Use the information in Scenario 9.9 to determine the average pantry space occupied by cat
food if each can takes up 13 cubic inches and Geoff obeys an EOQ policy for managing the cat
food purchase process.
A) 2.4 cubic feet
B) 24 cubic feet
C) 4.8 cubic feet
D) 12 cubic feet
Answer: A
Difficulty: Hard
38
48) The number of setups (or orders) per year is determined by the annual demand and
________.
Answer: order quantity
Keywords: setups per year, orders per year, order quantity, EOQ
49) The ________ determines the frequency and quantity to order.

Answer: lot size
Keywords: lot size
50) A ________ is an incentive to order larger quantities, where the price per unit decreases
when the order is sufficiently large.
Answer: quantity discount
Keywords: inventory, pressure for large inventories, payments to suppliers
51) If an item is ordered using an EOQ policy, as the annual demand for an item decreases, the
EOQ for the item ________.
Answer: decreases
Difficulty: Easy
52) In an EOQ model, as the annual demand for an item increases, the EOQ for the item
________.
Answer: increases
Difficulty: Easy
39
53) In an EOQ model, as the ordering cost for an item decreases, the EOQ for the item
________.
Answer: decreases
Difficulty: Easy
54) In an EOQ model, as the annual holding cost for an item increases, the EOQ for the item
________.
Answer: decreases
Difficulty: Easy
Keywords: EOQ, economic order quantity, annual demand, holding cost
55) The ________ is the average elapsed time between receiving replenishment orders of Q units
for a particular lot size.
Answer: TBO, time between orders
Keywords: TBO, time between orders
56) What assumptions are made in calculating the economic order quantity? Which of these
assumptions is the least realistic? Why?
Answer: The assumptions are constant demand known with certainty, no constraints on the size
of each lot, only two relevant costs, decisions made independently, and no uncertainty in lead-
time and supply. Answers will vary as to the least realistic assumption.
40
57) What production strategies should not employ an EOQ approach to ordering? Why?
Answer: The EOQ model should not be used if the firm uses a make-to-order strategy and if the
entire order must be delivered in one shipment. If the order size is constrained by capacity
limitations such as the size of the firm's productive resources or delivery trucks, then EOQ
should not be used.
58) Sketch the EOQ cost curves and describe their derivation.
Answer: The annual holding cost for this amount of inventory, which increases linearly with Q,
as Figure 9.6(a) shows, is
Annual holding cost = (Average cycle inventory)(Unit holding cost)
The annual ordering cost is:

Annual ordering cost = (Number of orders/Year)(Ordering or setup cost)
The average number of orders per year equals annual demand divided by Q. For example, if
1,200 units must be ordered each year and the average lot size is 100 units, then 12 orders will be
placed during the year. The annual ordering or setup cost decreases nonlinearly as Q increases,
as shown in Figure 9.6(b), because fewer orders are placed.
The total annual cycle-inventory cost, as graphed in Figure 9.6(c), is the sum of the two cost
components:
Total cost = Annual holding cost + Annual ordering or setup cost

41
59) A Theory of Constraints (TOC) advocate visits your factory and seems bemused by your use
of EOQ to set your batch sizes. You launch into a brilliant defense of the EOQ. The TOC
advocate grabs a piece of chalk and proceeds to sketch two sets of inventory cost curves on your
pristine shop floor. What will his two different sets of cost curves look like and why?
Answer: One possible problem with your use of EOQ might arise if the TOC advocate (or the
student answering the question) has read the supplement on special inventory models and
realizes that production rate and consumption rate should be used to tweak the basic EOQ
analysis. If the TOC disciple and the students haven't read that section, then their analysis should
proceed as follows.
The two sets of curves will have radically different values for S (setup cost) depending on
whether they represent bottleneck machines or non-bottlenecks. A bottleneck machine will have
an absurdly high S since it governs flow (and ultimately profit) for the entire plant. A non-
bottleneck machine will have a miniscule S since it has excess capacity and can be idle for some
time with no real impact on throughput. The high S will dictate larger lot sizes and provide
significant pressure to reduce setup times; the low S will dictate small lot sizes and no pressure to
reduce setup times.
Difficulty: Hard
Keywords: EOQ, economic order quantity, TOC, theory of constraints, bottleneck, non-
bottleneck
60) A company governed by an EOQ system decides to move in a more lean direction and hopes
to reduce their Q as much as possible. What specific steps might be taken to help them in their
journey towards a Q = 1?
Answer: Starting with the EOQ equation, the company can reduce D and S while increasing H
(they can't do much about 2). Of these three parameters, reducing D is probably the least
attractive option if it represents a decline in demand for their products. Reducing S is an
excellent way to proceed; making it easier for orders to be placed by working with suppliers,
implementing automated ordering systems, blanket purchase orders, etc., can significantly reduce
S and Q. Increasing H is a more philosophical move; if the company president broadcasts the
sentiment that inventory is evil and there will be consequences for holding it, then the value of H
has been virtually raised without playing financial games. Removing storage space or entire
warehouses would make it more expensive to hold inventory.
42
61) An assistant manager is reviewing the costs associated with the store's best-selling product.
The data available follows.
Demand = 500 units/year

Holding cost = $7/unit/year
a. What is the EOQ and its associated ordering and holding costs?
b. If annual demand doubles and all other costs remain the same, what is the new EOQ and total
annual cost?
Answer:
a.
Qopt = = = 75.59 units
Holding cost = H= 7 = $264.575
Ordering cost = S= (40) = $264.575
b.
Qopt = = = 106.9 units
H+ S= 7+ 40 = $748.33

Keywords: EOQ, economic order quantity, ordering cost, holding, cost
43
62) An assistant manager is reviewing the costs associated with one of the store's better-selling
products. The data available follows.
Demand = 400 units/year

Holding cost = 50¢/unit/year
a. They currently order a one-year supply. What are the total annual ordering cost and holding
cost for this order size?
b. What would be the EOQ and its associated ordering and holding costs?
Answer:
a.
Holding cost = H = 0.5 = $100
Ordering cost = S= (25) = $25
Total cost = H+ S= 0.5 + 25 = $125
b.
Qopt = = = 200
Holding cost = H= 0.5 = $50
Ordering cost = S= (25) = $50

Keywords: economic order quantity, holding cost, ordering, cost
44
63) A store has collected the following information on one of its products:
Demand = 5,000 units/year

Ordering costs = $12/order
Holding costs = $4/unit/year
Lead-time = 5 days weeks
Unit cost = $748/unit
Number of weeks per year = 50 weeks
a. The firm currently orders 500 units per order. What is the total cost of ordering and holding
these goods under this system?
b. Determine their economic order quantity and cost of ordering and holding goods using the
EOQ.
c. Form the ratio of the order quantities under the old policy and EOQ. Form the ratio of the
EOQ to the old order quantity. Then form the ratio of their total system costs under the two
ordering policies. Average these two ratios and compare this number with the ratio of the old
total cost with the total cost under an EOQ policy.
d. How do they compare?
Answer:
a.
Holding cost at Q = 500: H = 4 = $1000
Ordering cost at Q = 500: S= (12) = $120
TC = $1120
TC = $1120
b.
Qopt = =
Qopt = 173.21
Holding cost at Q = 173.21: H= 4 = $346.41
Ordering cost at Q = 173.21: S= (12) = $346.41
TC = $692.82
c.
Q/Q* = 500/173.21 = 2.89
Q*/Q = 173.21/500 = 0.346
(2.89 + 0.346)/2 = 1.62
TC/TC* = 1120/692.82 = 1.62
45
d.
The average of the two Q ratios is the same as the TC/TC* ratio.
Keywords: continuous review, order quantity, reorder quantity, reorder point, time between
orders (TBO), target inventory level
9.6 Continuous Review System
1) If on-hand inventory = 100 units, scheduled receipts = 100 units and backorders = 100 units,
the Inventory Position (IP) is the sum of the three, or 300 units.
Answer: FALSE
Reference: Continuous Review System
Keywords: continuous review system, inventory position
2) If on-hand inventory = 100 units, scheduled receipts = 100 units and backorders = 100 units,
the Inventory Position (IP) is 100 units.
Answer: TRUE
3) A continuous review system is sometimes called a reorder point system.

Answer: TRUE
Keywords: continuous review, reorder point
4) A continuous review system is sometimes called a fixed interval reorder system.

Answer: FALSE
46
5) The scheduled receipts are orders that have been placed but not yet received.
Answer: TRUE
Keywords: scheduled receipt
6) As the service level increases, the probability of not running out of stock during a cycle
decreases.
Answer: TRUE
Keywords: service level, stockout
7) The two-bin inventory system is a type of visual system.

Answer: TRUE
Keywords: two-bin, visual system
8) Which one of the following statements concerning a continuous review system is BEST?
A) The inventory position (IP) of an item measures the item's ability to satisfy future demand,
relying only on the on-hand inventory.
B) An item's inventory position under a continuous review system increases by Q units as soon
as an order is received.
C) An item's on-hand inventory increases by Q units as soon as an order is placed.
D) Under a continuous review system, an item's inventory position corresponds to the on-hand
inventory unless there are backorders or one or more scheduled receipts.
Answer: D
Difficulty: Hard
47
9) Which one of the following descriptions best defines the cycle-service level as a measure of
customer service?
A) the preferred proportion of annual demand instantaneously filled from stock
B) the number of stockouts tolerated per year
C) the preferred proportion of days in the year when an item is in stock
D) the desired probability of not running out of stock in any one inventory cycle
Answer: D
Keywords: cycle-service level, customer service
10) Which one of the following statements is BEST?

A) The level of safety stock maintained decreases when the desired cycle-service level increases.
B) The level of safety stock maintained decreases when the standard deviation of demand during
lead-time increases.
C) When no safety stock is maintained, stockouts will occur during approximately 50% of the
cycles.
D) The level of safety stock maintained is greater if mean absolute deviation (MAD) is used
rather than standard deviation in estimating forecast errors.
Answer: C
Keywords: safety stock, stockout
11) Consider the following conditions for an item used in the Hess Company's manufacturing
process:
On-hand inventory: 40 units

Open orders (scheduled receipts): 100 units
Backorders: 60 units
What is Hess's inventory position for this item?

A) 200 units
B) 140 units
C) 80 units
D) 40 units
Answer: C
Difficulty: Easy
Keywords: inventory position
48
process:

Reorder point: 100 units
Quantity per order: 50 units
Which of the following statements best describes Hess's situation regarding inventory
replenishment?
A) No action is required, since a scheduled receipt is due to be delivered to Hess.
B) To cover its backorders, Hess should order two lots of 50 units.
C) Because it is incurring backorders, Hess should increase its reorder point.
D) Hess should place an order for 50 units, since the inventory position is less than the reorder
point.
Answer: D
Keywords: inventory position, reorder point
process:

What is Hess's inventory position for this item?

A) 200 units
B) 160 units
C) 180 units
D) 80 units
Answer: B
Difficulty: Easy
Keywords: inventory position
49
process:

Reorder point: 150 units
Quantity per order: 50 units
Which of the following statements best describes Hess's situation regarding inventory
replenishment?
A) No action is required, since Hess's inventory position is greater than the reorder point.
B) Hess should order one lot of 50 units to cover its backorders.
C) Because it is incurring backorders, Hess should increase its reorder point.
D) Hess should place an order for 50 units, since their inventory position is less than the reorder
point.
Answer: A
Keywords: inventory position, reorder point
Scenario 9.7
Cranium, Inc., purchases term papers from an overseas supplier under a continuous review
system. The average demand for a popular mode is 300 units a day with a standard deviation of
30 units a day. It costs $60 to process each order and there is a five-day lead-time. The holding
cost for a paper is $0.25 per year and the company policy is to maintain a 98% service level.
Cranium operates 200 days per year. A normal distribution table is appended to this exam.
15) Use the information in Scenario 9.7. What is the reorder point R to satisfy a 98% cycle-
service level?
Answer: C
Keywords: reorder point, cycle-service level
50
16) Use the information in Scenario 9.7. What service level does a reorder point of 1,524 imply?
A) less than or equal to 50%
B) greater than 50% but less than or equal to 55%
C) greater than 55% but less than or equal to 60%
D) greater than 60%
Answer: D
Keywords: service level, reorder point
17) Use the information in Scenario 9.7. If lead-time increases by three days, what is the reorder
point needed to maintain a 98% service level?
B) greater than 2,400 units but less than 2,500 units
C) greater than 2,500 units but less than 2,600 units
Answer: C
Keywords: lead time, reorder point, service level
18) Use the information in Scenario 9.7. What is the cost of holding the safety stock necessary to
maintain the 98% service level?
B) greater than $30 but less than $40
C) greater than $40 but less than $50
D) greater than $50
Answer: B
Keywords: safety stock, service level
51
19) Use the information in Scenario 9.7. What is the standard deviation of demand throughout
the five-day lead-time period?
A) about 45 units
B) about 67 units
C) about 103 units
D) about 200 units
Answer: B
Keywords: standard deviation of demand, lead time
20) Use the information in Scenario 9.7. What combination of changes in lead-time and service
level would result in exactly the same level of safety stock as indicated in the table?
A) Lead-time drops to 41 days and service level increases to 99%.
B) Lead-time increases to 18.52 days and service level drops to 92%.
C) Lead-time increases to 20.54 days and service level drops to 90%.
D) Lead-time drops to 3.5 days and service level increases to 99.54%.
Answer: C
Difficulty: Hard
Keywords: standard deviation of demand, lead time, service level, safety stock, stockout
Scenario 9.8
A company operating under a continuous review system has an average demand of 50 units per
week for the item it produces. The standard deviation in weekly demand is 20 units. The lead-
time for the item is six weeks, and it costs the company $30 to process each order. The holding
cost for each unit is $10 per year. The company operates 52 weeks per year. A normal
distribution table is appended to this exam.
21) Use the information in Scenario 9.8. What is the desired safety stock level if the company
has a policy of maintaining a 90% cycle-service level?
Answer: B
Keywords: safety stock, cycle-service level, reorder
52
22) Use the information in Scenario 9.8. What is the reorder point if the company finally decides
to implement a 95 percent cycle-service level?
Answer: D
Keywords: reorder point, safety stock, cycle-service level
Scenario 9.10
The Dolly Llama Farm keeps an average of 50 of those funny creatures on hand and each
consumes a pound of grain a day, 365 days per year. Grain costs $12 for a 50 pound bag and it
costs the farm $10 to make a run to the feed store to pick up an order, regardless of order size. It
takes the feed store four days to acquire, mix, and bag the special blend of grains necessary to
make the feed the Dolly Llama Farm prefers. Storage costs for the feed runs 15% of the unit cost
as the cost of money, loss due to critters, and spoilage all add up.
23) Refer to Scenario 9.10. What should the reorder point be if demand and lead time are
invariant and the farm desires a 90% service level?
A) two bags
B) four bags
C) six bags
D) eight bags
Answer: B
53
24) Refer to Scenario 9.10. The actual usage for grain depends on which llamas show up at
feeding time, thus there is an average need for 50 pounds of grain each day with a standard
deviation of five pounds. The farm is willing to tolerate a 5% chance of running out of feed
before they can get some more hauled in. The llamas would prefer a 0% chance, but they don't
get a vote. What reorder point achieves the farm's objectives?
A) 4.32 bags
B) 5.16 bags
C) 6.28 bags
D) 7.80 bags
Answer: A
deviation of five pounds. In addition, there is some variability in how long it takes the feed store
to whip up a batch of llama feed. The standard deviation of the feed prep is one day. The farm is
willing to tolerate a 2% chance of running out of feed before they can get some more hauled in.
The llamas would prefer a 0% chance, but they don't get a vote. What reorder point achieves the
farm's objectives?
A) three bags
B) four bags
C) five bags
D) six bags
Answer: D
54
26) Refer to Scenario 9.10. There is some variability in how long it takes the feed store to whip
up a batch of llama feed. The standard deviation of the feed prep is one day. The farm is willing
to tolerate a 5% chance of running out of feed before they can get some more hauled in. The
llamas would prefer a 0% chance, but they don't get a vote. What reorder point achieves the
farm's objectives?
A) 246 pounds
B) 282 pounds
C) 304 pounds
D) 316 pounds
Answer: B
deviation of five pounds. In addition, there is some variability in how long it takes the feed store
to whip up a batch of llama feed. The standard deviation of the feed prep is one day. The farm is
willing to tolerate a 2% chance of running out of feed before they can get some more hauled in.
Which adjustment to their system would have the greatest impact on the reorder point?
A) lower the standard deviation of the lead time to one half of a day
B) decrease the service level to 90%
C) increase the standard deviation of daily demand to 10 pounds
D) reduce the average daily demand to 45 pounds
Answer: A
Difficulty: Hard
55
Scenario 9.11
Demand = 50,000 units/week
Standard deviation of weekly demand = 15,000 units
Average lead time = 8 weeks
Standard deviation of lead time: 3 weeks
Cycle-service level = 80%
A continuous review system is used to control inventory.
A normal distribution table is appended to this exam.
28) Use the information in Scenario 9.11. What is the standard deviation of demand during lead
time?
A) greater than 0 but less than or equal to 100,000 units
Answer: B
Keywords: continuous review system, variable demand, variable lead time, standard deviation
during lead time
29) Use the information in Scenario 9.11. What safety stock should the firm use for this product?
D) greater than 150,000 units but less than or equal to 200,000 units
E) greater than 200,000 units
Answer: C
Keywords: continuous review system, variable demand, variable lead time, safety stock
56
30) Use the information in Scenario 9.11. What reorder point should the firm use for this
product?
E) greater than 500,000 units
Answer: E
Keywords: continuous review system, variable demand, variable lead time, reorder point
31) Use the information in Scenario 9.11. If the firm decides to increase its cycle-service level to
90%, what is the new reorder point if all other parameters remain the same for this product?
A) greater than 550,000 units
E) greater than 0 but less than or equal to 150,000 units
Answer: A
57
Scenario 9.12
Number of days per year = 250 weeks
Standard deviation of weekly demand = 50 units
Average lead time = 5 days
Standard deviation of lead time: 2 days
Cycle-service level = 99%
A continuous review system is used to control inventory.
A normal distribution table is appended to this exam.
32) Use the information in Scenario 9.12. What is the standard deviation of demand during lead
time?
A) greater than 0 but less than or equal to 500 units
B) greater than 500 units but less than or equal to 1,500 units
Answer: B
during lead time
33) Use the information in Scenario 9.12. What safety stock should the firm use for this product?
A) greater than 0 but less than or equal to 500 units
B) greater than 500 units but less than or equal to 1,500 units
Answer: C
58
34) Use the information in Scenario 9.12. What reorder point should the firm use for this
product?
Answer: A
35) Use the information in Scenario 9.12. If the firm decides to reduce its cycle-service level to
95%, what is the new reorder point if all other parameters remain the same for this product?
Answer: B
36) A(n) ________ system is a system designed to track the remaining inventory of an item each
time a withdrawal is made to determine whether to replenish the item.
Answer: continuous review, reorder-point
37) The ________ is the measurement of an item's ability to satisfy future demand.
Answer: inventory position, IP
Keywords: IP, inventory position
59
38) ________ are orders that have been placed but not yet received.
Answer: Scheduled receipts, SR
Keywords: scheduled receipts, SR
39) The ________ is the predetermined minimum level that an inventory position must reach
before a fixed quantity (Q) is ordered.
Answer: reorder point, ROP
Keywords: reorder point
40) A(n) ________ is a system that allows employees to place orders when inventory visibly
reaches a certain marker.
Answer: visual system, single-bin system
Keywords: visual system, single-bin system
41) A(n) ________ system is a visual system in which an item's inventory is stored at two
different locations.
Answer: two-bin
Keywords: two-bin, bin
42) When considering reorder points and inventory position, if an item has an inventory position
of 200 units, an order will be placed only if the reorder point is ________.
Answer: less than or equal to 200 units
Keywords: reorder point, inventory position
60
43) Apply your understanding of forecasting to the idea of developing a reorder point for
uncertain demand. What could be done to make a reorder point more accurate?
Answer: The reorder point is determined by the average demand during lead time plus the
amount of safety stock needed. Safety stock is a function of the service level and the variance in
both the demand and the lead time. Reducing variance in demand and lead time will reduce the
amount of safety stock required and make a reorder point calculation less of a guess. In general,
forecasts farther in the future are less accurate than forecasts in the immediate future. Ability to
delay orders or ship more quickly would mitigate the impact of this variance. Forecasts for
aggregated products are more accurate than forecasts for individual items, so some degree of
standardization would result in better performance for a reorder point.
Difficulty: Hard
Keywords: reorder point, forecast
44) Compare and contrast the Q and P systems of inventory control.

Answer: The primary advantages of the P system are: the convenience of administration of the
system because replenishments are made at fixed intervals, that orders for multiple items from
the same supplier can be combined, and that the inventory position needs only to be known when
the review is made for the order. The primary advantages of the Q system are that the review
frequency of each item is individualized, leading to reduction in ordering and holding costs; the
fixed lot size that, if large enough, may qualify for quantity discounts; and lower safety stock.
Difficulty: Hard
Keywords: P system, Q system, inventory control
45) What is a base-stock system?

Answer: A base-stock system issues a replenishment order each time a withdrawal is made, for
the same amount as the withdrawal.
Keywords: base-stock system
61
46) What is a two-bin system and how does it work?
Answer: A two-bin system is a visual version of the Q system, in which an item's inventory is
stored at two different locations. Inventory is first withdrawn from one bin. If this bin is empty,
the second bin provides backup to cover demand until a replenishment order arrives. An empty
first bin signals the need to place a new order.
Keywords: two-bin system, visual control
47) Jimmy's Egg is a specialty restaurant featuring 47 different kinds of omelettes in three
different sizes. They use 60 dozen eggs a day that they order from an egg factory with a lead
time of five days. One fine day they stock their chiller and note that there are only 25 dozen eggs
remaining. They have a backorder of 15 cases and an open order of 200 cases. What is their
inventory position? Should they place an order?
Answer: IP = OH + SR - BO
IP = 25 + 200 - 15
IP = 210
R = Demand during lead time
R = 60 × 5 = 300
with no safety stock
Their inventory position falls short of their reorder point so they should place an order.
Difficulty: Hard
Keywords: order quantity, reorder point, inventory position
62

Cycle-service level = 90% (z for 90% = 1.28)
Lead-time = 2 weeks
a. If a firm uses the continuous review system to control the inventory, what would be the order
quantity and reorder point?
b. The firm decided to change to the periodic review system to control the item's inventory. For
the most recent review, an inventory clerk checked the inventory of this item and found 300
units. There were no scheduled receipts or backorders at the time. How many units should be
ordered? (HINT: Use the EOQ model to derive P, the time between reviews.)
Answer:
a.
b.

Difficulty: Hard
63

Lead-time = 2 weeks
a. If a firm uses the continuous review system to control the inventory, what would be the order
quantity and reorder point?
b. The firm decided to change to the periodic review system to control the item's inventory. For
the most recent review, an inventory clerk checked the inventory of this item and found 200
units. There were no scheduled receipts or backorders at the time. How many units should be
ordered? (HINT: Use the EOQ model to derive P, the time between reviews.)
Answer:
a.
Qopt = = = 387.30 → 387 units
R= + zσdLT = (10,000/50)2 + 1.65(25 ) = 400.00 +58.34 = 458.34 → 458 units
b.
TBOEOQ = (50 weeks/year) = (50) = 1.94 weeks → 2 weeks
T = (P + L) + zσP+L = (2 + 2) + 1.65(25) = 800.00 + 82.50 = 883.00 units
Order quantity = T - IP = 883 - 200 = 683 units

Difficulty: Hard
64

Lead-time = 5 days weeks
If a firm uses the continuous review system to control the inventory, what would be the order
quantity?
Answer:
Qopt = =
Qopt = 244.95
65
51) The Hastings Company is a nation-wide wholesaler for small electronic devices. One of its
most popular items is a new GPS unit called the WAMI-1000. Hastings has gathered the
following information, and has asked you to develop a continuous review inventory control
system for this item:
Order quantity for each order placed with manufacturer = 10,000 units
Average demand = 1,000 units/week
Standard deviation of lead time: 1.5 weeks
a. What is the standard deviation of demand during lead time?

b. What is the safety stock level that should be carried for the WAMI-1000?
c. What is the reorder point for the WAMI-1000?
d. Summarize the actions Hastings should take using your new inventory system.
e. If Hastings decides to increase its cycle-service level from 90% to 95% (z for 95% = 1.65),
how does this change the actions that should be taken?
Answer:
a. σdLT = = = = 1,565.25 →1,565 units
b. Safety Stock = z ∙ σdLT = (1.28)(1,565) = 2,003 units
c. Reorder Point = ∙ + Safety Stock = (1,000) (5) + 2,003 = 7,003 units
d. When the inventory level of the model WAMI-1000 reaches the reorder point of 7,003 units,
Hastings should place an order with the manufacturer for 10,000 units.
e. At cycle-service level of 95%, z = 1.65
New Safety Stock = z ∙ σdLT = (1.65)(1,565) = 2,582 units
New Reorder Point = ∙ + Safety Stock = (1,000)(5) + 2,582 = 7,582 units
Hastings should now place a new order with the manufacturer for 10,000 units when the
inventory level of the WAMI-1000 reaches the higher reorder point of 7,582 units.
during lead time, safety stock, reorder point
66
52) The medical staff on Shudder Island uses an average of 60 vials of thorazine every day. This
demand is normally distributed with a standard deviation of 15 vials. Since this is an important
item, they have decided on a 98% service level. Ferries run infrequently, so the lead time for
delivery is 12 days on average with a standard deviation of 2 days. Lead time is also normally
distributed.
a. What is the expected demand during lead time?
b. What is the standard deviation of demand during lead time?
c. What is the average safety stock?
d. What is the reorder point?
e. If the company desired to lower the reorder point, which of these initiatives would lower it
by the greatest amount — reducing the lead time by 10%, reducing the standard deviation of lead
time by 10%, or reducing the service level by 10%?
Answer:
a. Expected demand during lead time
= 60 × 12 = 720
b. σdLT = = = = 130.77 → 131 units
c. Safety Stock = z ∙ σdLT = (2.05)(131) = 268.55 units
d. Reorder Point = ∙ + Safety Stock = (720) + 268.5 = 988.5 units
e. Reducing the service level from 98% to 88% lowers the ROP to 874. If service level is
lowered to 88.2%, the ROP is essentially the same. The other reductions are not as great;
dropping the lead time from 12 to 10.8 results in an ROP of 914 and dropping the standard
deviation of lead time 1.8 drops the ROP to 965.7.
Difficulty: Hard
during lead time, safety stock, reorder point
67
53) The Hastings Company is a nation-wide wholesaler for small electronic devices. One of its
most popular items is a new GPS unit called the WAMI-1000. Hastings has gathered the
following information, and has asked you to develop a continuous review inventory control
system for this item:
Order quantity for each order placed with manufacturer = 50,000 units
Average demand = 5,000 units/week
Standard deviation of weekly demand = 1,000 units
Standard deviation of lead time: 1 week
a. What is the standard deviation of demand during lead time?

b. What is the safety stock level that should be carried for the WAMI-1000?
c. What is the reorder point for the WAMI-1000?
d. Summarize the actions Hastings should take using your new inventory system.
e. If Hastings decides to increase its cycle-service level to from 90% to 99% (z for 99% = 2.33),
how does this change the actions that should be taken?
Answer:
a. σdLT = = = = 5,385.16 → 5,385 units
b. Safety Stock = z ∙ σdLT = (1.28)(5,385) = 6,893 units
c. Reorder Point = ∙ + Safety Stock = (5,000) (4) + 6,893 = 26,893 units
d. When the inventory level of the model WAMI-1000 reaches the reorder point of 26,893 units,
Hastings should place an order with the manufacturer for 50,000 units.
e. At cycle-service level of 99%, z = 2.33
New Safety Stock = z ∙ σdLT = (2.33)(5,385) = 12,547 units

New Reorder Point = ∙ + Safety Stock = (5,000)(4) + 12,547 = 32,547 units
Hastings should now place a new order with the manufacturer for 50,000 units when the
inventory level of the WAMI-1000 reaches the higher reorder point of 32,547 units.
68
9.7 Periodic Review System
1) A periodic review system is a system in which an item's inventory position is reviewed

periodically rather than continuously.
Answer: TRUE
Reference: Periodic Review System
Keywords: periodic review, continuous
2) A mom and pop gas station near a remote lake popular with anglers is more likely to use a
periodic review system than a chain of department stores.
Answer: TRUE
Keywords: periodic review, continuous
3) An inventory system answers two important questions: when to order and how much to order.
Which of the following statements correctly explains how a Q system (continuous review
system) or a P system (periodic review system) answers these questions?
A) Under a Q system, a fixed quantity is ordered every P time period.
B) Under a Q system, an order is placed to replenish the inventory position up to the target level
T when the inventory position reaches the reorder point R.
C) Under a P system, a fixed quantity Q is ordered when the inventory position reaches the
reorder point R.
D) Under a P system, an order is placed to replenish the inventory position up to the target level
T every P time periods.
Answer: D
Keywords: Q system, P system, inventory target level (T), inventory position
69
4) Which one of the following statements is BEST?
A) A P system requires more safety stock than a Q system.
B) A P system lends itself more to quantity discounts than does a Q system.
C) A P system requires more administrative control and computer support than does a Q system.
D) In a periodic review system, the value of Q is kept the same from one cycle to another.
Answer: A
Keywords: P system, Q system
5) Which one of the following statements represents an advantage of the P system over the Q
system?
A) Less safety stock is carried to achieve the same service level.
B) The replenishment intervals can be more easily individualized for items.
C) Orders can be more easily combined to the same supplier.
D) A P system is more suitable for quantity discounts and capacity limitations.
Answer: C
Keywords: P system, Q system
6) Which one of the following statements represents an advantage of a Q system over the P
system?
A) A perpetual inventory system is not mandatory.
B) Orders for multiple items from the same supplier can be combined more easily.
C) Fixed replenishment intervals are possible, which can be, administratively, quite convenient.
D) The Q system is more suited for quantity discounts and physical limitations.
Answer: D
Keywords: Q system, P system
70
Operations Management Processes and Supply Chains 11th Edition Krajewski Test Bank
7) Which one of the following statements about inventory control systems is BEST?
A) A single-bin system is essentially a P system, with the target inventory and current inventory
position established visually.
B) A base-stock system minimizes ordering and setup costs by placing orders more infrequently.
C) The base-stock system is mostly used for inexpensive items because it maximizes cycle
inventory costs.
D) Visual systems are intended for use with high-value items, such as jet engines, that don't
experience a steady demand.
Answer: A
Keywords: inventory control, single-bin system, P system
71
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9.1 Inventory Trade-Offs

6) One component of the holding cost of inventory is interest.

7) One component of the ordering cost of inventory is shrinkage.

13) The term lot size signifies:

15) Which of the following generates pressure to decrease inventories?

26) What are the components of holding cost?

9.2 Types of Inventory

6) Items sold to a firm's customers are called:

19) The ________ determines the frequency and quantity to order.

3) Which of the following is NOT a lever for reducing cycle inventories?

6) One of the secondary levers for reducing pipeline inventory is to:

8) A ________ lever is one that must be activated if inventory is to be reduced.

10) What are the secondary levers for cycle inventory?

12) What are the secondary levers for pipeline inventory?

9.4 ABC Analysis

5) Cycle counting is an inventory-control method whereby storeroom personnel physically count

Series Unit Cost Count

Series Unit Cost Count

9) Use Table 9.1 to identify the best statement.

19) What is ABC analysis and how does it work?

9.5 Economic Order Quantity

4) As the annual demand increases, the EOQ also increases.

7) Which one of the following is NOT an assumption of the EOQ model?

The Earplug Superstore operates 52 weeks a year.

Weekly demand = 50 units

49) The ________ determines the frequency and quantity to order.

The annual ordering cost is:

Total cost = Annual holding cost + Annual ordering or setup cost

Demand = 500 units/year

Holding cost = H= 7 = $264.575

Ordering cost = S= (40) = $264.575

Reference: Economic Order Quantity

Demand = 400 units/year

Ordering cost = S= (25) = $25

Total cost = H+ S= 0.5 + 25 = $125

Holding cost = H= 0.5 = $50

Ordering cost = S= (25) = $50

Reference: Economic Order Quantity

Demand = 5,000 units/year

Ordering cost at Q = 500: S= (12) = $120

Ordering cost at Q = 173.21: S= (12) = $346.41

9.6 Continuous Review System

3) A continuous review system is sometimes called a reorder point system.

4) A continuous review system is sometimes called a fixed interval reorder system.

7) The two-bin inventory system is a type of visual system.

10) Which one of the following statements is BEST?

On-hand inventory: 40 units

What is Hess's inventory position for this item?

On-hand inventory: 40 units

On-hand inventory: 80 units

What is Hess's inventory position for this item?

On-hand inventory: 80 units

A normal distribution table is appended to this exam.

A normal distribution table is appended to this exam.

44) Compare and contrast the Q and P systems of inventory control.