Krajewski Om9 Tif 12 SuppD

Supplement D  Special Inventory Models
Supplement
D Special Inventory Models
TRUE/FALSE
1. The economic production lot size represents the maximum quantity of on-hand inventory
for a manufacturer.
Answer: False
Reference: Noninstantaneous Replenishment
Difficulty: Moderate
Keywords: ELS, economic production lot size, inventory
2. For analysis using the economic production lot size (ELS) model to be useful, the
producer must be able to produce the item faster than it is consumed.
Answer: True
Keywords: ELS, economic production lot size
3. When facing quantity discounts, the EOQ found with the lowest price level is always the
lowest total cost plan.
Answer: False
Reference: Quantity Discounts
Keywords: EOQ, quantity discount
4. The one-period inventory model is commonly known as the newsboy problem.

Answer: True
Reference: One-Period Decisions
Keywords: newsboy, one-period period
MULTIPLE CHOICE
5. Consider a noninstantaneous replenishment situation in which the production rate is 100

units per day, the demand rate is four units per day, and the economic production lot size
is 500 units. Which of the following statements is true?
a. The average cycle inventory is fewer than 225 units.
b. The average cycle inventory is greater than 300 units.
c. The rate of buildup in cycle inventory during the production cycle is fewer than 100
units per day.
d. The rate of buildup in cycle inventory during the production cycle is greater than or
equal to 400 units per day.
Answer: c
Keywords: noninstantaneous replenishment, buildup
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Copyright ©2010 Pearson Education
Scenario D.1
Jerry Allison is in charge of production for a small producer of plumbing supplies. The cricket
model has an estimated annual demand of 12,000 units and can be produced at a production rate
of 90 units per day. The company produces (and sells) the cricket 300 days per year. Setup cost to
produce this model averages $22 and the item has a holding cost of $3 per unit per year.
6. Use the information in Scenario D.1. What is the economic production lot size (ELS)?
a. Fewer than or equal to 400 units
b. Greater than 400 units but fewer than or equal to 480 units
c. Greater than 480 units but fewer than or equal to 500 units
d. Greater than 500 units
Answer: d
Keywords: ELS, noninstantaneous replenishment, economic production lot size
7. Use the information in Scenario D.1. How many production runs per year are needed if
Jerry chooses to produce at his economic production lot size (ELS)?
a. Fewer than or equal to 10 runs
b. Greater than 10 runs but fewer than or equal to 20 runs
c. Greater than 20 runs but fewer than or equal to 30 runs
d. Greater than 30 runs
Answer: c
Keywords: ELS, noninstantaneous replenishment, economic production, run
8. Use the information in Scenario D.1. If Jerry chooses to produce batches dictated by the
economic production lot size (ELS) model, how many days elapse between the start of
consecutive production runs (what is the time between runs or TBO)?
a. Fewer than or equal to 8 days
b. Greater than 8 days but fewer than or equal to 10 days
c. Greater than 10 days but fewer than or equal to 12 days
d. Greater than 12 days
Answer: d
Keywords: ELS, noninstantaneous replenishment, economic production, TBO
9. Use the information in Scenario D.1. What is the maximum inventory if Jerry chooses to
produce at the economic production lot size (ELS)?
Answer: b
Keywords: ELS, noninstantaneous replenishment, economic production, maximum
inventory
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10. Use the information in Scenario D.1. If Jerry chooses to produce the batch size suggested
by the economic production lot size (ELS) model, what is the annual cost?
a. Less than or equal to $900
b. Greater than $900 but less than or equal to $950
c. Greater than $950 but less than or equal to $1000
d. Greater than $1000
Answer: b
Keywords: ELS, noninstantaneous replenishment, economic production, total cost
11. Warren’s Ice Cream makes 4 different flavors of ice cream using their secret process and
top secret recipes. Each of their flavors is equally popular and experiences a demand of
5,000 gallons/year. Warren’s process is capable of producing 100 gallons/day once they
incur the $25 setup cost. The ice cream holding cost is 10% of the $5 per gallon price.
Warren’s plant runs 250 days a year and stays busy doing so but management feels they
can add another flavor to their product line and increase their revenue. Which of the
following statements is appropriate for this scenario?
a. Warren’s can comfortably add a fifth flavor without increasing the number of days
they operate.
b. Warren’s cannot add the fifth flavor because the holding cost would increase.
c. Warren’s can add the fifth flavor only if there is zero setup time between flavors.
d. Warren’s cannot add the fifth flavor because demand would exceed capacity.
Answer: c
Difficulty: Difficult
12. In a noninstantaneous replenishment model, as the daily demand approaches the daily
production rate:
a. the number of production runs per year decreases.
b. the length in days of a production run increases.
c. the economic lot size increases.
d. the time between production runs decreases.
Answer: d
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13. A pencil supplier just introduced quantity discounts. The price schedule follows.
Order Quantity Price per Unit

000–199 $4.00
200–399 $3.00
400 and more $2.00
XYZ store’s annual demand remains at 500 units and ordering cost at $10 per order. If
annual holding cost is 10 percent of the pencils’ per-unit price, what order quantity
should XYZ select to minimize all costs?
Answer: d
Keywords: quantity discount, order size
14. Which one of the following statements about quantity discounts is best?
a. The minimum cost point on each price curve is always feasible.
b. A price break is the maximum quantity needed to get a discount.
c. If the EOQ for the lowest price is feasible, this is the best lot size.
d. Either price or quantity is sufficient for the search for the best lot size.
Answer: c
Keywords: quantity discount, feasible
15. As an inventory manager, you must decide on the order quantity for an item. Its annual
demand is 300 units. Ordering cost is $20 each time an order is placed, and the holding
cost is 30 percent of the per-unit price. Your supplier provided the following price
schedule.
Price per Unit Order Quantity

$6.00 000–149
$5.00 150–199
$4.00 200 and more
What ordering-quantity policy do you recommend?

b. Greater than 50 units but fewer than or equal to 149
d. More than 199 units
Answer: d
Reference: Quantity Discount
Keywords: quantity discount, order
558
Scenario D.2
Kyle store sells K2 skis. The store makes a $200 profit per unit sold during the ski season, but it
will take a $50 loss per unit if sold after the season is over. The following discrete probability
distribution has been estimated for the season’s demand.
Demand (D) Demand Probability

10 0.1
20 0.3
30 0.3
40 0.2
50 0.1
16. Use the information in Scenario D.2. What is the payoff with an order quantity ( Q) of 40
units if the demand (D) is 30 units?
a. Less than or equal to $2,000
b. Greater than $2,000 but less than or equal to $4,000
c. Greater than $4,000 but less than or equal to $6,000
d. Greater than $6,000
Answer: c
Keywords: one-period order, quantity, payoff
17. Use the information in Scenario D.2. What is the best order quantity?
Answer: b
Keywords: one-period order, quantity
559
Scenario D.3
Consider an item with the following discrete demand distribution for a one-period inventory
decision.
Demand (D) Demand Probability

10 0.15
20 0.20
30 0.30
40 0.20
50 0.15
This item experiences a seasonal demand pattern. A profit of $15 per unit is made if the item is
sold in season, but a loss of $10 per unit is incurred if sold after the season is over.
18. Use the information in Scenario D.3. What is the payoff when 40 units are ordered but a
demand of 50 materializes?
a. $150
b. $300
c. $450
d. $600
Answer: d
Keywords: one-period, payoff quantity
19. Use the information in Scenario D.3. What is the payoff when 40 units are ordered but a
demand of 30 materializes?
a. $0
b. $100
c. $350
d. $450
Answer: c
Keywords: one-period, payoff quantity
20. Use the information in Scenario D.3. What is the order quantity with the highest expected
payoff?
a. 20 units
b. 30 units
c. 40 units
d. 50 units
Answer: b
Keywords: one-period, order quantity, payoff
560
21. A world traveler prepares to leave the comforts of home for a back to nature visit to
Gilligan’s Island, where all transactions are conducted in coconuts and the banking
system is completely undeveloped. The traveler can buy cocoanuts for $2 each before the
journey. If he fails to bring enough cocoanuts with him and runs out, he must get some
cocoanuts flown in at a cost of $5 each. If he finishes his vacation and has leftover
cocoanuts he can cash them in when he returns home, but will receive only $1.50 per
cocoanut. What is his loss per unit if he overstocks on cocoanuts prior to leaving home?
a. $0.50
b. $1
c. $3.50
d. $4.50
Answer: a
Difficulty: Easy
22. Which of these statements about the one-period model is best?

a. Purchasing a quantity with the highest expected payoff will result in a positive payoff
regardless of the actual demand during the period.
b. The loss per unit cannot exceed the profit per unit.
c. If demand exceeds the purchased quantity then the actual payoff exceeds the
expected payoff for that quantity.
d. The expected payoff for a purchase quantity is always less than the actual payoff for
that quantity.
Answer: c
Difficulty: Easy
FILL IN THE BLANK
23. The ____________ is the optimal lot size in situations in which replenishment is not
instantaneous.
Answer: economic production lot size, ELS
Keywords: economic lot size, ELS, noninstantaneous replenishment
24. A manufacturer produces aluminum cans internally rather than purchasing them and uses
the economic production lot size equation to govern this process. The length of time that
the aluminum can batch runs is ____________ and the time between the start of one
batch of cans to the next is ____________.
Answer: ELS/p, ELS/d
Difficulty: Hard
Keywords: economic, lot, size, ELS
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25. A(n) ____________ is the minimum quantity needed to receive a discount.

Answer: price break
Keywords: price break, discount quantity
26. The need for one-time inventory decisions also can arise in manufacturing plants when
____________ items are made to a single order and ____________ are high.
Answer: customized, scrap quantities
Difficulty: Hard
Keywords: one-period, newsboy, scrap, special
SHORT ANSWERS
27. Briefly explain why the economic production lot size (ELS) is actually larger than the
EOQ when there are noninstantaneous replenishments.
Answer: The cycle inventory is less than Q/2, which reduces the annual holding cost of
ordering Q units. Thus a larger order quantity is justified.
Keywords: ELS, noninstantaneous replenishment
28. Why are there discontinuities (areas where the curve jumps up or down and is not
smooth) in the total cost curve in the quantity discount model?
Answer: The total cost curve has breaks due to the price breaks. Reading the total cost
curve from left to right, when purchase quantities reach a price break, an increase in one
unit will trigger a per-unit decrease in price for all units in the order, which accounts for
the reduction in total cost.
Keywords: quantity discount, total cost
29. When do one-period decisions on inventory arise in practice?

Answer: The one-period inventory models are appropriate when retailers handle seasonal
goods that must be sold at a reduced price after the selling season. For manufacturing
situations, it can arise when customized products are made and scrap rates are high.
Keywords: one-period, newsboy
562
PROBLEMS
30. A production manager is making a decision on batch size for a product with an annual
demand of 25,000 units per year. The setup cost for each batch is $45 and once the setup
is complete, the product may be produced at the rate of 650 units per day. There is a
holding cost of $2 per unit per year and the plant operates on a 250-day production year.
How big should the production batch be and how long (in days) will it take to produce
the batch?
Answer:

Keywords: ELS, noninstantaneous replenishment, batch size
31. A production manager uses the economic lot size approach to determine the batch size for
a product with an annual demand of 20,000 units per year. The setup cost for each batch
is $50 and once the setup is complete, the product may be produced at the rate of 800
units per day. There is a holding cost of $2 per unit per year and the plant operates on a
250-day production year. If the machine used to produce this product is needed for
another item and it takes one day to set up regardless of product, how many production
days are available for production of the new item?
Answer:

Keywords: ELS, noninstantaneous replenishment, batch size, TBO
563
32. As an inventory manager, you must decide on the order quantity for an item. Its annual
demand is 1,000 units. Ordering costs are $50 each time an order is placed, and the
holding cost is 25 percent of the per-unit price. Your supplier provided the following
price schedule.
Quantity Price per Unit

1–199 $10.00
200–499 $ 9.80
500 or more $ 9.60
What ordering-quantity policy do you recommend?

Answer:
Start at lowest cost
, not feasible
Solve for next lowest cost
, feasible,
Compare costs at the feasible 202 and at the lower cost for discount at 500
Therefore, the best order size is 202, with a cost of $10,295.

Keywords: quantity discount, order
564
33. A newsstand is trying to determine how many bundles of newspapers to stock. For each
bundle, the newsstand makes $20. However, they lose $5 per bundle if they do not sell.
The following discrete probability distribution has been estimated for their daily demand.
How many bundles should they stock?
Demand Probability
(bundles)
4 .10
5 .20
6 .30
7 .30
8 .10
Answer:
Profit $20.00 (if sold during preferred period)
Loss $5.00 (if sold after preferred period)
Demand 4 5 6 7 8
Probability 0.1 0.2 0.3 0.3 0.1
Demand
4 5 6 7 8
Quantity 4 80 80 80 80 80
5 75 100 100 100 100
6 70 95 120 120 120
7 65 90 115 140 140
8 60 85 110 135 160
Weighted Payoffs
Order Expected
Quantity Payoff
4 80 Greatest Expected Payoff 115
5 97.5
6 110 Associated with Order Quantity 7
7 115
8 112.5

Keywords: one-period, discrete probability, order quantity
565

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Supplement D  Special Inventory Models

D Special Inventory Models

4. The one-period inventory model is commonly known as the newsboy problem.

5. Consider a noninstantaneous replenishment situation in which the production rate is 100

Order Quantity Price per Unit

Price per Unit Order Quantity

What ordering-quantity policy do you recommend?

Demand (D) Demand Probability

Demand (D) Demand Probability

22. Which of these statements about the one-period model is best?

FILL IN THE BLANK

25. A(n) ____________ is the minimum quantity needed to receive a discount.

29. When do one-period decisions on inventory arise in practice?

Reference: Noninstantaneous Replenishment

Reference: Noninstantaneous Replenishment

Quantity Price per Unit

What ordering-quantity policy do you recommend?

Solve for next lowest cost

Therefore, the best order size is 202, with a cost of $10,295.

Reference: One-Period Decisions

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