ch23 Student: ___________________________________________________________________________ 1. One important use of inventories in manufacturing is to decouple operations through the use of work in process inventories. True False 2. The objective of inventory management is to minimize the cost of holding inventory. True False 3. A retail store that carries twice the inventory as its competitor will provide twice the customer service level. True False 4. The overall objective of inventory management is to achieve satisfactory levels of customer service while keeping inventory costs reasonable. True False 5. The two main concerns of inventory control relate to the costs and the level of customer service. True False 6. To provide satisfactory levels of customer service while keeping inventory costs within reasonable bounds, two fundamental decisions must be made about inventory: the timing and size of orders. True False 7. In the EOQ formula, holding costs under 10% are expressed as percentages, above 10% are expressed as annual unit costs. True False 8. DVD recorders would be an example of independent demand items. True False 9. Reorder point models are primarily used for dependent demand items. True False 10. An example of inventory holding cost is the cost of moving goods to temporary storage after receipt from a supplier. True False 11. Decoupling operations applies to the railroad industry. True False 12. Interest, insurance, and opportunity costs are all associated with holding costs. True False 13. The A-B-C approach involves classifying inventory items by unit cost, with expensive items classified as ‘A' items and low cost items classified as ‘C' items. True False 14. An inventory buffer adds value and lowers cost in all supply chains. True False 15. In the A-B-C approach, C items typically represent about 15 percent of the number of items, but 60 percent of the dollar usage. True False 16. EOQ inventory models are basically concerned with the timing of orders. True False 17. The average inventory level is inversely related to order size. True False 18. The average inventory level and the number of orders per year are inversely related: As one increases, the other decreases. True False 19. The EOQ should be regarded as an approximate quantity rather than an exact quantity. Thus, rounding the calculated value is acceptable. True False 20. Carrying cost is a function of order size; the larger the order, the higher the inventory carrying cost. True False 21. Understocking an inventory item is a sure sign of inadequate inventory control. True False 22. Annual ordering cost is inversely related to order size. True False 23. The total cost curve is relatively flat near the EOQ. True False 24. Because price isn't a factor in the EOQ formula, quantity discounts won't affect EOQ calculations. True False 25. In the quantity discount model, if holding costs are given as a percentage of unit price, a graph of the total cost curves will have the same EOQ for each curve. True False 26. In the quantity discount model, the optimum quantity will always be found on the lowest total cost curve. True False 27. ROP models indicate to managers the time between orders. True False 28. When to order can be calculated by the ROP and expressed as a quantity. True False 29. The rate of demand is an important factor in determining the ROP. True False 30. The inventory value of the supply chain exceeds the inventory value of the organization's work in process inventory. True False 31. Safety stock is held because we anticipate future demand. True False 32. Variability in demand and/or lead time can be compensated for by safety stock. True False 33. Solving quality problems can lead to lower inventory levels. True False 34. ROP models assume that demand during lead time is composed of a series of dependent daily demands. True False 35. Profit margins tend to be inversely related to inventory turns. True False 36. In the fixed-order interval model, the order size is the same for each order. True False 37. The fixed-order interval model requires a continuous monitoring of inventory levels. True False 38. Discrete stocking levels are used when an organization doesn't want visibility of inventory levels. True False 39. The fixed-order interval model requires a larger amount of safety stock than the ROP model for the same risk of a stockout. True False 40. The single-period model can be very helpful in determining when to order. True False 41. The single-period model can be very helpful in determining how much to order. True False 42. Monitoring inventory turns over time can be used as a measure of performance. True False 43. A single-period model would be used mainly by organizations going out of business. True False 44. The basic EOQ model ignores the purchasing cost. True False 45. When the item is offered for resale, shortage costs in the single-period model can include a charge for loss of customer goodwill. True False 46. In the single-period model, the service level is the probability that demand will not exceed the stocking level in any period. True False 47. A quantity discount will lower the reorder point. True False 48. It is critical that the exact quantity calculated in the EOQ model be ordered. True False 49. Safety stock eliminates all stock outs. True False 50. The calculation of safety stock requires knowledge of demand and lead time variability. True False 51. The two basic issues in inventory are how much to order and when to order. True False 52. Cycle counting can be used in motorcycle inventory control. True False 53. Using the EOQ model, the higher an item's carrying costs, the more frequently it will be ordered. True False 54. The cycle time represents the time between reorder point and receipt of order. True False 55. The cost of placing an order is a function of order size. True False 56. All stock outs must be avoided. True False 57. In the basic EOQ model, annual holding cost is one-half of the total annual cost for all items purchased. True False 58. Quantity discounts are generally given for large number of orders. True False 59. The larger the number of orders placed, the larger the average level of inventory. True False 60. Which of the following is not one of the assumptions of the basic EOQ model? A. Annual demand requirements are known and constant. B. Lead time does not vary. C. Each order is received in a single delivery. D. Quantity discounts are available. E. All of the above are necessary assumptions. 61. Which of the following interactions with vendors would potentially lead to inventory reductions? A. reduce lead times B. increase safety stock C. less frequent purchases D. larger batch quantities E. longer order intervals 62. A non-linear cost related to order size is the cost of: A. interest B. insurance C. taxes D. receiving E. space 63. In a two-bin inventory system, the amount contained in the second bin is equal to the: A. ROP B. EOQ C. amount in the first bin D. optimum stocking level E. safety stock 64. When carrying costs are stated as a percentage of unit price, the minimum points on the total cost curves: A. Line up B. Equal zero C. Do not line up D. Cannot be calculated E. Depend on the percentage assigned 65. Dairy items, fresh fruit and newspapers are items that: A. do not require safety stocks B. cannot be ordered in large quantities C. are subject to deterioration and spoilage D. require that prices be lowered every two days E. have minimal holding costs 66. Which of the following is least likely to be included in order costs? A. processing vendor invoices for payment B. moving delivered goods to temporary storage C. inspecting incoming goods for quantity D. taking an inventory to determine how much is needed E. temporary storage of delivered goods 67. In an A-B-C system, the typical percentage of the number of items in inventory for A items is about: A. 10 B. 30 C. 50 D. 70 E. 90 68. In the A-B-C classification system, items which account for fifteen percent of the total dollar-volume for a majority of the inventory items would be classified as: A. A items B. B items C. C items D. A items plus B items E. B items plus C items 69. In the A-B-C classification system, items which account for sixty percent of the total dollar-volume for few inventory items would be classified as: A. A items B. B items C. C items D. A items plus B items E. B items plus C items 70. The purpose of "cycle counting" is to: A. count all the items in inventory B. count bicycles and motorcycles in inventory C. reduce discrepancies between inventory records and actual D. reduce theft E. count 10% of the items each month 71. The EOQ model is most relevant for which one of the following? A. ordering items with dependent demand B. determination of safety stock C. ordering perishable items D. determining fixed interval order quantities E. determining fixed order quantities 72. Which is not a true assumption in the EOQ model? A. Production rate is constant B. Lead time doesn't vary C. No more than 3 items are involved D. Usage rate is constant E. No quantity discounts 73. In a supermarket, a vendor's restocking the shelves every Monday morning is an example of: A. safety stock replenishment B. economic order quantities C. reorder points D. fixed order interval E. blanket ordering 74. A cycle count program will usually require that ‘A' items be counted: A. daily. B. once a week. C. monthly. D. quarterly. E. more frequently than annually. 75. A risk avoider would want ______ safety stock. A. Less B. More C. The same D. Zero E. 50% 76. In the basic EOQ model, if annual demand doubles, the effect on the EOQ is: A. It doubles. B. It is four times its previous amount. C. It is half its previous amount. D. It is about 70 percent of its previous amount. E. It increases by about 40 percent. 77. In the basic EOQ model, if lead time increases from five to 10 days, the EOQ will: A. double B. increase, but not double C. decrease by a factor of two D. remain the same E. none of the above 78. In the basic EOQ model, an annual demand of 40 units, an ordering cost of $5, and a holding cost of $1 per unit per year will result in an EOQ of: A. 20 B. square root of 200 C. 200 D. 400 E. none of these 79. In the basic EOQ model, if D = 60 per month, S = $12, and H = $10 per unit per month, EOQ is: A. 10 B. 12 C. 24 D. 72 E. 144 80. In the basic EOQ model, if annual demand is 50, carrying cost is $2, and ordering cost is $15, EOQ is approximately: A. 11 B. 20 C. 24 D. 28 E. 375 81. Which of the following is not true for Economic Production Quantity model? A. Usage rate is constant. B. Production rate exceeds usage rate. C. Run size exceeds maximum inventory. D. There are no ordering or setup costs. E. Average inventory is one-half maximum inventory. 82. Given the same demand, setup/ordering costs, and carrying costs, the EOQ calculated using incremental replenishment will be ____________ if instantaneous replenishment was assumed: A. greater than the EOQ B. equal to the EOQ C. smaller than the EOQ D. greater than or equal to the EOQ E. smaller than or equal to the EOQ 83. The introduction of quantity discounts will cause the optimum order quantity to be: A. smaller B. unchanged C. greater D. smaller or unchanged E. unchanged or greater 84. A fill rate is the percentage of _____ filled by stock on hand. A. Shipments B. Demand C. Inventory D. Safety stock E. Lead time 85. In the quantity discount model, with carrying cost stated as a percentage of unit purchase price, in order for the EOQ of the lowest curve to be optimum, it must: A. have the lowest total cost B. be in a feasible range C. be to the left of the price break quantity for that price D. have the largest quantity compared to other EOQ's E. none of the above 86. Which one of the following is not generally a determinant of the reorder point? A. rate of demand B. length of lead time C. lead time variability D. stockout risk E. purchase cost 87. If no variations in demand or lead time exist, the ROP will equal: A. the EOQ B. expected usage during lead time C. safety stock D. the service level E. the EOQ plus safety stock 88. If average demand for an inventory item is 200 units per day, lead time is three days, and safety stock is 100 units, the reorder point is: A. 100 units B. 200 units C. 300 units D. 600 units E. 700 units 89. Which one of the following is implied by a "lead time" service level of 95 percent? A. Approximately 95 percent of demand during lead time will be satisfied. B. Approximately 95 percent of inventory will be used during lead time. C. The probability is 95 percent that demand during lead time will exactly equal the amount on hand at the beginning of lead time. D. The probability is 95 percent that demand during lead time will not exceed the amount on hand at the beginning of lead time. E. none of the above 90. Which one of the following is implied by an "annual" service level of 95 percent? A. Approximately 95 percent of demand during lead time will be satisfied. B. The probability is 95 percent that demand will exceed supply during lead time. C. The probability is 95 percent that demand will equal supply during lead time. D. The probability is 95 percent that demand will not exceed supply during lead time. E. None of the above. 91. Daily usage is exactly 60 gallons per day. Lead time is normally distributed with a mean of 10 days and a standard deviation of 2 days. What is the standard deviation of demand during lead time? A. 60 x 2 B. 60 times the square root of 2 C. 60 times the square root of 10 D. 60 x 10 E. none of the above 92. Lead time is exactly 20 days long. Daily demand is normally distributed with a mean of 10 gallons per day and a standard deviation of 2 gallons. What is the standard deviation of demand during lead time? A. 20 x 2 B. 20 x 10 C. 2 times the square root of 20 D. 2 times the square root of 10 E. none of the above 93. All of the following are possible reasons for using the fixed order interval model except: A. Supplier policy encourages use. B. Grouping orders can save in shipping costs. C. The required safety stock is lower than with an EOQ/ROP model. D. It is suited to periodic checks of inventory levels rather than continuous monitoring. E. Continuous monitoring is not practical. 94. Which of these products would be most apt to involve the use of a single-period model? A. gold coins B. hammers C. fresh fish D. calculators E. frozen corn 95. In a single-period model, if shortage and excess costs are equal, then the optimum service level is: A. 0 B. .33 C. .50 D. .67 E. none of these 96. In a single-period model, if shortage cost is four times excess cost, then the optimum service level is ___ percent. A. 100 B. 80 C. 60 D. 40 E. 20 97. In the single-period model, if excess cost is double shortage cost, the approximate stockout risk, assuming an optimum service level, is ___ percent. A. 100 B. 67 C. 50 D. 33 E. 5 98. If, in a single-period inventory situation, the probabilities of demand being 1, 2, 3, or 4 units are .3, .3, .2, and .2, respectively. If two units are stocked, what is the probability of selling both of them? A. .5 B. .6 C. .7 D. .8 E. none of these 99. The management of supply chain inventories focuses on: A. internal inventories B. external inventories C. both internal and external inventories D. safety stock elimination E. optimizing reorder points 100. An operations strategy for inventory management should work towards: A. increasing lot sizes B. decreasing lot sizes C. increasing safety stocks D. decreasing service levels E. increasing order quantities 101. Cycle stock inventory is intended to deal with ________. A. excess costs B. shortage costs C. stockouts D. expected demand E. quantity discounts 102. An operations strategy which recognizes high carrying costs and reduces ordering costs will result in: A. unchanged order quantities B. slightly decreased order quantities C. greatly decreased order quantities D. slightly increased order quantities E. greatly increased order quantities 103. The need for safety stocks can be reduced by an operations strategy which: A. increases lead time B. increases lead time variability C. increases lot sizes D. decreases ordering costs E. decreases lead time variability 104. If average demand for an item is 20 units per day, safety stock is 50 units, and lead time is four days, the ROP will be: A. 20 B. 50 C. 70 D. 80 E. 130 105. With an A-B-C system, an item that had a high demand but a low annual dollar volume would probably be classified as: A. A B. B C. C D. none of these 106. The fixed order interval model would be most likely to be used for this situation: A. A company has switched from mass production to lean production. B. Production is done in batches. C. Spare parts are ordered when a new machine is purchased. D. Grouping orders can save shipping costs. E. none of these 107. Which item would be least likely to be ordered under a fixed order interval system? A. textbooks at a college bookstore B. auto parts at an assembly plant C. cards at a gift shop D. canned peas at a supermarket E. none of these 108. Which one of these would not be a factor in determining the reorder point? A. the EOQ B. the lead time C. the variability of demand D. the demand or usage rate E. all are factors 109. A car rental agency uses 96 boxes of staples a year. The boxes cost $4 each. It costs $10 to order staples, and carrying costs are $0.80 per box on an annual basis. Determine: (A) the order quantity that will minimize the sum of ordering and holding boxes of staples (B) the annual cost of ordering and carrying the boxes of staples 110. A service garage uses 120 boxes of cleaning cloths a year. The boxes cost $6 each. Ordering cost is $3 and holding cost is 10 percent of purchase cost per unit on an annual basis. Determine: (A) The economic order quantity (B) The total cost of carrying the cloths (excluding purchase price) (C) The average inventory 111. A shop that makes candles offers a scented candle, which has a monthly demand of 360 boxes. Candles can be produced at a rate of 36 boxes per day. The shop operates 20 days a month. Assume that demand is uniform throughout the month. Setup cost is $60 for a run, and holding cost is $2 per box on a monthly basis. Determine the following: (A) the economic run size (B) the maximum inventory (C) the number of days in a run 112. Estimated demand for gold-filled lockets at Sam's Bargain Jewelry and Housewares is 2,420 lockets a year. Manager Veronica Winters has indicated that ordering cost is $45, and that the following price schedule applies: 1 to 599 lockets, $.90 each; 600 to 1,199 lockets, $.80 each; and 1,200 or more, $.75 each. What order size will minimize total cost if carrying cost is $.18 per locket on an annual basis? 113. Suppose that you are the manager of a production department that uses 400 boxes of rivets per year. The supplier quotes you a price of $8.50 per box for an order size of 199 boxes or less, a price of $8.00 per box for orders of 200 to 999 boxes, and a price of $7.50 per box for an order of 1,000 or more boxes. You assign a holding cost of 20 percent of the price to this inventory. What order quantity would you use if the objective is to minimize total annual costs of holding, purchasing, and ordering? Assume ordering cost is $80/order. 114. The operator of a concession at a downtown location estimates that he will sell 400 bags of circus peanuts during a month. Carrying costs are 17 percent of unit price and ordering cost is $22. The price schedule for bags of peanuts is: 1 to 199, $1.00 each; 200 to 499, $.94 each; and 500 or more $.87 each. What order size would be most economical? 115. A dry cleaning firm uses an average of 20 gallons of cleaning fluid a day. Usage tends to be normally distributed with a standard deviation of two gallons per day. Lead time is four days, and the desired service level is 92 percent. What amount of safety stock is appropriate if a fixed order size of 600 gallons is used? 116. Suppose that usage of cooking oil at Harry's Fish Fry is normally distributed with an average of 15 gallons/day and a standard deviation of two gallons/day. Harry has just fired the manager and taken over operating the restaurant himself. Harry has asked you to help him decide how to reorder cooking oil in order to achieve a service level which is seven times the risk of stockout (7/8). Lead time is eight days. Assume that cooking oil can be ordered as needed. 117. A bakery's use of corn sweetener is normally distributed with a mean of 80 gallons per day and a standard deviation of four gallons per day. Lead time for delivery of the corn sweetener is normal with a mean of six days and a standard deviation of two days. If the manager wants a service level of 99 percent, what reorder point should be used? 118. A manager reorders lubricant when the amount on-hand reaches 422 pounds. Average daily usage is 45 pounds, which is normally distributed with a standard deviation of three pounds per day. Lead time is nine days. What is the risk of a stockout? 119. Given the following information: Order quantity = 300; = 20 units; desired lead time service level = .86. Find: (A) the expected number of units short per cycle (B) the annual service level 120. A company can produce a part it uses in an assembly operation at the rate of 50 an hour. The company operates eight hours a day, 300 days a year. Daily usage of the part is 300 parts. The company uses the part every day. The run size is 6,000 parts. The annual holding cost is $2 per unit, and setup cost is $100. (A) How many runs per year will there be? (B) While production is occurring, how many parts per day are being added to inventory? (C) Assuming that production begins when there are no parts on hand, what is the maximum number of parts in inventory? (D) The machine is dedicated to this product. Every so often, preventive maintenance, which requires six working days, must be performed on it. Does this interrupt production cycles, or is there enough time between cycles to perform the maintenance? Explain. 121. The injection molding department of a company uses 40 pounds of a powder a day. Inventory is reordered when the amount on hand is 240 pounds. Lead time averages five days. It is normally distributed and has a standard deviation of two days. What is the probability of a stockout during lead time? 122. A shop owner uses a reorder point approach to restocking a certain raw material. Lead time is six days. Usage of the material during lead time is normally distributed with a mean of 42 pounds and a standard deviation of 4 pounds. When should the raw material be reordered if the acceptable risk of a stockout is 3%? 123. The manager of a bakery orders three 'cake-to-go' wedding cakes every Saturday to accommodate last minute purchases. Demand for the cakes can be described by a Poisson distribution that has a mean of 2. The cakes cost $10 each to prepare, and they sell for $26 each. Any cakes that haven't been sold by the end of the day are sold for half price the next day. Usually, half of those are sold and the rest are tossed. What stocking level would be appropriate? 124. A manager has just received a revised price schedule from a vendor. What order quantity should the manager use in order to minimize total costs? Annual Demand is 120 units, ordering cost is $8, and annual carrying cost is $1 per unit. A manufacturer is contemplating a switch from buying to producing a certain item. Setup cost would be the same as ordering cost. The production rate would be about double the usage rate. 125. Compared to the EOQ, the economic production quantity would be approximately: A. the same B. 20 percent larger C. 40 percent larger D. 20 percent smaller E. 40 percent smaller 126. Compared to the EOQ, the maximum inventory would be approximately: A. 70 percent higher B. 30 percent higher C. the same D. 30 percent lower E. 70 percent lower The manager of the Quick Stop Corner Convenience Store (which never closes) sells four cases of Stein beer each day. Order costs are $8.00 per order, and Stein beer costs $.80 per six-pack (each case of Stein beer contains four six-packs). Orders arrive three days from the time they are placed. Daily holding costs are equal to five percent of the cost of the beer. 127. At what point should he reorder Stein beer? A. 0 cases remaining B. 4 cases remaining C. 12 cases remaining D. 16 cases remaining E. 20 cases remaining 128. If he were to order 16 cases of Stein beer at a time, what would be the length of an order cycle? A. 0.25 days B. 3 days C. 1 day D. 4 days E. 20 days 129. If he were to order 16 cases of Stein beer at a time, what would be the average inventory level? A. 4 cases B. 12 cases C. 8 cases D. 20 cases E. 16 cases 130. If he were to order 16 cases of Stein beer at a time, what would be the daily total inventory costs, EXCLUDING the cost of the beer? A. $2.00 B. $4.00 C. $1.28 D. $3.28 E. $2.56 131. What is the economic order quantity for Stein beer? A. 8 cases B. 11 cases C. 14 cases D. 20 cases E. 32 cases Ann Chovies, owner of the Perfect Pasta Pizza Parlor, uses 20 pounds of pepperoni each day in preparing pizzas. Order costs for pepperoni are $10.00 per order, and carrying costs are 4 cents per pound per day. Lead time for each order is 3 days, and the pepperoni itself costs $3.00 per pound. 132. At what point should she reorder pepperoni? A. 20 pounds remaining B. 40 pounds remaining C. 60 pounds remaining D. 80 pounds remaining E. 100 pounds remaining 133. If she were to order 80 pounds of pepperoni at a time, what would be the length of an order cycle? A. 0 days B. 0.25 days C. 3 days D. 4 days E. 5 days 134. If she were to order 80 pounds of pepperoni at a time, what would be the average inventory level? A. 20 pounds B. 40 pounds C. 60 pounds D. 80 pounds E. 100 pounds 135. If she were to order 80 pounds of pepperoni at a time, what would be the total daily costs, including the cost of the pepperoni? A. $60.00 B. $63.20 C. $64.00 D. $64.10 E. $65.00 136. What is the economic order quantity for pepperoni? A. 20 pounds B. 40 pounds C. 60 pounds D. 80 pounds E. 100 pounds The Operations Manager for Shadyside Savings & Loan orders cash from her home office for her very popular "BIG BUCKS" automated teller machine, which only dispenses $100 bills. She estimates that this machine dispenses an average of 12,500 bills per month, and that carrying a bill in inventory costs 10 percent of its value annually. She knows that each order for these bills costs $300 for clerical and armored car delivery costs, and that order lead time is six days. 137. Assuming a thirty-day month, at what point should bills be reordered? A. 0 bills remaining B. 417 bills remaining C. 2,500 bills remaining D. 10,000 bills remaining E. 12,500 bills remaining 138. Assuming a thirty-day month, if she were to order 6,000 bills at a time, what would be the length of an order cycle? A. 0.48 days B. 2.08 days C. 6 days D. 8.4 days E. 14.4 days 139. If she were to order 6,000 bills at a time, what would be the dollar value of the average inventory level? A. $3,000 B. $6,000 C. $12,500 D. $300,000 E. $600,000 140. If she were to order 6,000 bills at a time, what would be the average monthly total costs, EXCLUDING the value of the bills? A. $625 B. $1,250 C. $2,500 D. $3,125 E. $37,500 141. What is the economic order quantity? A. 600 bills B. 3,000 bills C. 949 bills D. 6,215 bills E. 12,500 bills Given the following data for a particular inventory item: 142. What is the economic order quantity for this item? 143. For the economic order quantity, what is the length of an order cycle? 144. For the economic order quantity, what is the reorder point? 145. For the economic order quantity, what is the average inventory level? 146. For the economic order quantity, what are average weekly ordering costs? 147. For the economic order quantity, what are average weekly carrying costs? 148. For the economic order quantity, what are average weekly total costs, including the cost of the inventory item? The materials manager for a billiard ball maker must periodically place orders for resin, one of the raw materials used in producing billiard balls. She knows that manufacturing uses resin at a rate of 50 kilograms each day, and that it costs $.04 per day to carry a kilogram of resin in inventory. She also knows that the order costs for resin are $100 per order, and that the lead time for delivery is four (4) days. 149. At what point should resin be reordered? A. 0 kilograms remaining B. 50 kilograms remaining C. 200 kilograms remaining D. 400 kilograms remaining E. 500 kilograms remaining 150. If order size was 1,000 kilograms of resin, what would be the length of an order cycle? A. 0.05 days B. 4 days C. 16 days D. 20 days E. 50 days 151. If the order size was 1,000 kilograms of resin, what would be the average inventory level? A. 50 kilograms B. 200 kilograms C. 500 kilograms D. 800 kilograms E. 1,000 kilograms 152. If the order size was 1,000 kilograms of resin, what would be the daily total inventory costs, EXCLUDING the cost of the resin? A. $5 B. $10 C. $20 D. $25 E. $40 153. What is the economic order quantity for resin? A. 50 kilograms B. 100 kilograms C. 250 kilograms D. 500 kilograms E. 1,000 kilograms 154. A firm stocks a seasonal item that it buys for $22/unit and sells for $29 unit. During the season, daily demand can be described using a Poisson distribution with a mean of 2.4. Because of the nature of the item, units remaining at the close of business each day must be removed at a cost of $2 each. What is the optimum stocking level, and what is the effective service level? 155. Joe's Coffee Shoppe has fresh doughnuts delivered each morning. Daily demand for plain doughnuts is approximately normal with a mean of 200 and a standard deviation of 15. Joe pays $1.20 per dozen and has a standing order for 16 dozen. Joe and the staff eat any leftovers. What is the implied shortage cost? 156. A restaurant prepares Peking Duck daily at a cost of $18 per duck. Each duck generates revenue of $47 if sold. Demand for Peking Duck can be described by a Poisson distribution with a mean of 4.2 ducks per day. Unsold ducks at the end of each day are converted to duck soup at an additional cost of $5 over and above the resulting value as soup. How many ducks should be prepared each day? 157. A machine is expected to use approximately three spare parts during its useful life. The spares cost $200 each and have no salvage value or other use. The manager has ordered five spares. Assuming a Poisson usage rate, what range of shortage cost is implied? 158. A manager intends to order a new machine and must now decide on the number of spare parts to order along with the machine. The parts cost $400 each and have no salvage value. The manager has compiled a frequency distribution for the probable usage of spare parts, as shown. For what range of shortage costs would stocking one spare part constitute an optimal decision? Number of The Corner Newsstand has demand for a certain weekly magazine that can be approximated by a Poisson distribution with a mean of 9.0. Magazines are purchased for $1.50. 159. If unsold copies can be returned for half credit and the owner stocks ten copies, what is the implied range of shortage cost? 160. If unsold copies must be destroyed and copies sell for $4.00 each, find the optimum stocking level. 161. If unsold copies can be returned for half credit and copies sell for $4.25 each, find the optimal stocking level. 162. Demand for a component averages 80 units per week, with a weekly standard deviation of demand of 14 units. The current supplier of this component offers a four-week lead time. Stockout risk is to be kept at 8%. Assume that it costs $50 to hold one unit in inventory for a year. Suppose the annual cost for the items would be $500 higher if they were purchased from another vendor, but that vendor would offer a two-week lead time. Would it be better to go with the more-expensive but more-responsive vendor? ch23 Key 1. One important use of inventories in manufacturing is to decouple operations through the use of work in process inventories. TRUE Decoupling operations is an important use of inventories. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-01 Define the term inventory; list the major reasons for holding inventories; and list the main requirements for effective inventory management. Stevenson - Chapter 13 #1 Topic Area: The Nature and Importance of Inventories 2. The objective of inventory management is to minimize the cost of holding inventory. FALSE The objective of inventory management is to allow satisfactory customer service while keeping costs down. AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 13-04 Explain the objectives of inventory management. Stevenson - Chapter 13 #2 Topic Area: Requirements for Effective Inventory Management 3. A retail store that carries twice the inventory as its competitor will provide twice the customer service level. FALSE There is a limit to how high service level can go; if the competitor's service level is 90%, the retailer can't double that. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-02 Discuss the nature and importance of service inventories. Stevenson - Chapter 13 #3 Topic Area: The Nature and Importance of Inventories 4. The overall objective of inventory management is to achieve satisfactory levels of customer service while keeping inventory costs reasonable. TRUE This is the overall objective of inventory management. AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 13-04 Explain the objectives of inventory management. Stevenson - Chapter 13 #4 Topic Area: The Nature and Importance of Inventories 5. The two main concerns of inventory control relate to the costs and the level of customer service. TRUE These are the essential facets of inventory control. AACSB: Analytic Blooms: Apply Difficulty: Easy Learning Objective: 13-04 Explain the objectives of inventory management. Stevenson - Chapter 13 #5 Topic Area: The Nature and Importance of Inventories 6. To provide satisfactory levels of customer service while keeping inventory costs within reasonable bounds, two fundamental decisions must be made about inventory: the timing and size of orders. TRUE These are the fundamental decisions regarding inventory control. AACSB: Analytic Blooms: Apply Difficulty: Easy Learning Objective: 13-04 Explain the objectives of inventory management. Stevenson - Chapter 13 #6 Topic Area: The Nature and Importance of Inventories 7. In the EOQ formula, holding costs under 10% are expressed as percentages, above 10% are expressed as annual unit costs. FALSE Holding costs are expressed in monetary terms, whether as a set value or as a percentage of the per-unit cost. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #7 Topic Area: How Much to Order: Economic Order Quantity Models 8. DVD recorders would be an example of independent demand items. TRUE Components of the DVD recorders would be dependent demand items. AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 13-01 Define the term inventory; list the major reasons for holding inventories; and list the main requirements for effective inventory management. Stevenson - Chapter 13 #8 Topic Area: Introduction 9. Reorder point models are primarily used for dependent demand items. FALSE Reorder point models are primarily used for independent demand items. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #9 Topic Area: Reorder Point Ordering 10. An example of inventory holding cost is the cost of moving goods to temporary storage after receipt from a supplier. FALSE These are ordering costs. AACSB: Reflective Thinking Blooms: Remember Difficulty: Hard Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #10 Topic Area: Requirements for Effective Inventory Management 11. Decoupling operations applies to the railroad industry. FALSE Decoupling refers to buffering operations in manufacturing. AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 13-01 Define the term inventory; list the major reasons for holding inventories; and list the main requirements for effective inventory management. Stevenson - Chapter 13 #11 Topic Area: The Nature and Importance of Inventories 12. Interest, insurance, and opportunity costs are all associated with holding costs. TRUE These are holding costs. AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #12 Topic Area: Requirements for Effective Inventory Management 13. The A-B-C approach involves classifying inventory items by unit cost, with expensive items classified as ‘A' items and low cost items classified as ‘C' items. FALSE A-B-C approach classifies inventory according to some measure of importance. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-05 Describe the A-B-C approach and explain how it is useful. Stevenson - Chapter 13 #13 Topic Area: Requirements for Effective Inventory Management 14. An inventory buffer adds value and lowers cost in all supply chains. FALSE Many buffers increase costs across supply chains. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-01 Define the term inventory; list the major reasons for holding inventories; and list the main requirements for effective inventory management. Stevenson - Chapter 13 #14 Topic Area: The Nature and Importance of Inventories 15. In the A-B-C approach, C items typically represent about 15 percent of the number of items, but 60 percent of the dollar usage. FALSE C items typically represent about 60 percent of the number of items and about 15 percent of the dollar usage. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-05 Describe the A-B-C approach and explain how it is useful. Stevenson - Chapter 13 #15 Topic Area: Requirements for Effective Inventory Management 16. EOQ inventory models are basically concerned with the timing of orders. FALSE EOQ models are concerned with the size of orders. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #16 Topic Area: How Much to Order: Economic Order Quantity Models 17. The average inventory level is inversely related to order size. FALSE The average inventory level is positively related to order size. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #17 Topic Area: How Much to Order: Economic Order Quantity Models 18. The average inventory level and the number of orders per year are inversely related: As one increases, the other decreases. TRUE These are inversely related. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #18 Topic Area: How Much to Order: Economic Order Quantity Models 19. The EOQ should be regarded as an approximate quantity rather than an exact quantity. Thus, rounding the calculated value is acceptable. TRUE The total cost function is relatively flat, so rounding costs little. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #19 Topic Area: How Much to Order: Economic Order Quantity Models 20. Carrying cost is a function of order size; the larger the order, the higher the inventory carrying cost. TRUE Larger order quantities lead to higher inventory carrying cost. AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 13-04 Explain the objectives of inventory management. Stevenson - Chapter 13 #20 Topic Area: How Much to Order: Economic Order Quantity Models 21. Understocking an inventory item is a sure sign of inadequate inventory control. FALSE Having an occasional stockout is not necessarily a sign of inadequate inventory control. AACSB: Reflective Thinking Blooms: Understand Difficulty: Hard Learning Objective: 13-01 Define the term inventory; list the major reasons for holding inventories; and list the main requirements for effective inventory management. Stevenson - Chapter 13 #21 Topic Area: Reorder Point Ordering 22. Annual ordering cost is inversely related to order size. TRUE Annual ordering cost decreases as order size increases. AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #22 Topic Area: How Much to Order: Economic Order Quantity Models 23. The total cost curve is relatively flat near the EOQ. TRUE Thus approximating the EOQ can be a very good solution. AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #23 Topic Area: How Much to Order: Economic Order Quantity Models 24. Because price isn't a factor in the EOQ formula, quantity discounts won't affect EOQ calculations. FALSE If quantity discounts are offered, the EOQ might vary based on different holding costs. AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 13-08 Describe the quantity discount model and solve typical problems. Stevenson - Chapter 13 #24 Topic Area: How Much to Order: Economic Order Quantity Models 25. In the quantity discount model, if holding costs are given as a percentage of unit price, a graph of the total cost curves will have the same EOQ for each curve. FALSE Total cost curves will differ across the price levels. AACSB: Reflective Thinking Blooms: Remember Difficulty: Hard Learning Objective: 13-08 Describe the quantity discount model and solve typical problems. Stevenson - Chapter 13 #25 Topic Area: How Much to Order: Economic Order Quantity Models 26. In the quantity discount model, the optimum quantity will always be found on the lowest total cost curve. FALSE The optimum quantity might actually be when the discount is passed up. AACSB: Reflective Thinking Blooms: Remember Difficulty: Hard Learning Objective: 13-08 Describe the quantity discount model and solve typical problems. Stevenson - Chapter 13 #26 Topic Area: How Much to Order: Economic Order Quantity Models 27. ROP models indicate to managers the time between orders. FALSE ROP models indicate when, with regard to on-hand inventory, orders should be placed. AACSB: Reflective Thinking Blooms: Remember Difficulty: Hard Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #27 Topic Area: Reorder Point Ordering 28. When to order can be calculated by the ROP and expressed as a quantity. TRUE ROP models indicate when, with regard to on-hand inventory, orders should be placed. AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #28 Topic Area: Reorder Point Ordering 29. The rate of demand is an important factor in determining the ROP. TRUE The demand rate multiplied by the lead time is a major part of the ROP. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #29 Topic Area: Reorder Point Ordering 30. The inventory value of the supply chain exceeds the inventory value of the organization's work in process inventory. TRUE There can be raw materials and finished goods inventory at the organization. Other organizations in the supply chain will have inventories, too. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-01 Define the term inventory; list the major reasons for holding inventories; and list the main requirements for effective inventory management. Stevenson - Chapter 13 #30 Topic Area: The Nature and Importance of Inventories 31. Safety stock is held because we anticipate future demand. FALSE Safety stock is held because we anticipate fluctuations in future demand or in lead time. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #31 Topic Area: Reorder Point Ordering 32. Variability in demand and/or lead time can be compensated for by safety stock. TRUE Safety stock can be used to accommodate these. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #32 Topic Area: Reorder Point Ordering 33. Solving quality problems can lead to lower inventory levels. TRUE Leaning out the organization can be facilitated by solving quality problems. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-01 Define the term inventory; list the major reasons for holding inventories; and list the main requirements for effective inventory management. Stevenson - Chapter 13 #33 Topic Area: Operations Strategy 34. ROP models assume that demand during lead time is composed of a series of dependent daily demands. FALSE ROP models assume that demand during lead time is composed of a series of independent daily demands. AACSB: Reflective Thinking Blooms: Remember Difficulty: Hard Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #34 Topic Area: Reorder Point Ordering 35. Profit margins tend to be inversely related to inventory turns. TRUE This is typically the case. AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 13-04 Explain the objectives of inventory management. Stevenson - Chapter 13 #35 Topic Area: The Nature and Importance of Inventories 36. In the fixed-order interval model, the order size is the same for each order. FALSE Order size varies from order to order in a fixed-order interval model. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-03 Explain periodic and perpetual review systems. Stevenson - Chapter 13 #36 Topic Area: How Much to Order: Fixed-Order-Interval Model 37. The fixed-order interval model requires a continuous monitoring of inventory levels. FALSE The fixed-order interval model leads to periodic monitoring of inventory levels. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-03 Explain periodic and perpetual review systems. Stevenson - Chapter 13 #37 Topic Area: How Much to Order: Fixed-Order-Interval Model 38. Discrete stocking levels are used when an organization doesn't want visibility of inventory levels. FALSE Discrete stocking refers to having to stock a discrete number of units. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems. Stevenson - Chapter 13 #38 Topic Area: The Single-Period Model 39. The fixed-order interval model requires a larger amount of safety stock than the ROP model for the same risk of a stockout. TRUE Fixed-order intervals typically carry more safety stock. AACSB: Reflective Thinking Blooms: Remember Difficulty: Hard Learning Objective: 13-03 Explain periodic and perpetual review systems. Stevenson - Chapter 13 #39 Topic Area: How Much to Order: Fixed-Order-Interval Model 40. The single-period model can be very helpful in determining when to order. FALSE The single-period model helps determine how many to order. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems. Stevenson - Chapter 13 #40 Topic Area: The Single-Period Model 41. The single-period model can be very helpful in determining how much to order. TRUE The single-period model helps determine how many to order. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems. Stevenson - Chapter 13 #41 Topic Area: The Single-Period Model 42. Monitoring inventory turns over time can be used as a measure of performance. TRUE Greater turnover often implies better performance. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-04 Explain the objectives of inventory management. Stevenson - Chapter 13 #42 Topic Area: The Nature and Importance of Inventories 43. A single-period model would be used mainly by organizations going out of business. FALSE The single-period model applies to many regularly occurring circumstances. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems. Stevenson - Chapter 13 #43 Topic Area: The Single-Period Model 44. The basic EOQ model ignores the purchasing cost. TRUE Only if quantity discounts are offered does purchasing cost enter into EOQ analysis. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #44 Topic Area: How Much to Order: Economic Order Quantity Models 45. When the item is offered for resale, shortage costs in the single-period model can include a charge for loss of customer goodwill. TRUE Greater loss of goodwill would equate with a higher shortage cost. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems. Stevenson - Chapter 13 #45 Topic Area: The Single-Period Model 46. In the single-period model, the service level is the probability that demand will not exceed the stocking level in any period. TRUE If demand exceeds the stocking level, a stockout as occurred. AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems. Stevenson - Chapter 13 #46 Topic Area: The Single-Period Model 47. A quantity discount will lower the reorder point. FALSE The reorder point is independent of quantity discounts. AACSB: Reflective Thinking Blooms: Remember Difficulty: Hard Learning Objective: 13-08 Describe the quantity discount model and solve typical problems. Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #47 Topic Area: How Much to Order: Economic Order Quantity Models Topic Area: Reorder Point Ordering 48. It is critical that the exact quantity calculated in the EOQ model be ordered. FALSE Because the total cost curve is flat, modest rounding of the EOQ is permissible. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #48 Topic Area: How Much to Order: Economic Order Quantity Models 49. Safety stock eliminates all stock outs. FALSE Safety stock only ensures that a given likelihood of stock outs. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #49 Topic Area: Reorder Point Ordering 50. The calculation of safety stock requires knowledge of demand and lead time variability. TRUE Both of these play a role in the calculation of safety stock. AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #50 Topic Area: Reorder Point Ordering 51. The two basic issues in inventory are how much to order and when to order. TRUE Quantity and timing are the two basic issues in inventory management. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-01 Define the term inventory; list the major reasons for holding inventories; and list the main requirements for effective inventory management. Stevenson - Chapter 13 #51 Topic Area: The Nature and Importance of Inventories 52. Cycle counting can be used in motorcycle inventory control. TRUE Cycle counting can also be used in automobile inventory control. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-01 Define the term inventory; list the major reasons for holding inventories; and list the main requirements for effective inventory management. Stevenson - Chapter 13 #52 Topic Area: Requirements for Effective Inventory Management 53. Using the EOQ model, the higher an item's carrying costs, the more frequently it will be ordered. TRUE As carrying costs increase, the optimal order quantity decreases. AACSB: Reflective Thinking Blooms: Remember Difficulty: Hard Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #53 Topic Area: How Much to Order: Economic Order Quantity Models 54. The cycle time represents the time between reorder point and receipt of order. FALSE The cycle time represents the time between orders. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #54 Topic Area: Reorder Point Ordering 55. The cost of placing an order is a function of order size. FALSE The cost of placing an order is typically unrelated to order size. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #55 Topic Area: How Much to Order: Economic Order Quantity Models 56. All stock outs must be avoided. FALSE Most of the time it would be too costly to avoid all stockouts. AACSB: Reflective Thinking Blooms: Remember Difficulty: Hard Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #56 Topic Area: Reorder Point Ordering 57. In the basic EOQ model, annual holding cost is one-half of the total annual cost for all items purchased. FALSE Annual holding cost equals half the product of the order quantity and the per-unit-per-year holding cost. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #57 Topic Area: How Much to Order: Economic Order Quantity Models 58. Quantity discounts are generally given for large number of orders. FALSE Quantity discounts are given for smaller, but larger, orders. AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 13-08 Describe the quantity discount model and solve typical problems. Stevenson - Chapter 13 #58 Topic Area: How Much to Order: Economic Order Quantity Models 59. The larger the number of orders placed, the larger the average level of inventory. FALSE More orders means smaller quantities, which means lower average inventory. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #59 Topic Area: How Much to Order: Economic Order Quantity Models 60. Which of the following is not one of the assumptions of the basic EOQ model? A. Annual demand requirements are known and constant. B. Lead time does not vary. C. Each order is received in a single delivery. D. Quantity discounts are available. E. All of the above are necessary assumptions. In the basic EOQ model quantity discounts are not available. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #60 Topic Area: How Much to Order: Economic Order Quantity Models 61. Which of the following interactions with vendors would potentially lead to inventory reductions? A. reduce lead times B. increase safety stock C. less frequent purchases D. larger batch quantities E. longer order intervals Reducing lead times would have the effect of reducing safety stock requirements and therefore reducing inventories. AACSB: Reflective Thinking Blooms: Understand Difficulty: Hard Learning Objective: 13-01 Define the term inventory; list the major reasons for holding inventories; and list the main requirements for effective inventory management. Stevenson - Chapter 13 #61 Topic Area: Operations Strategy 62. A non-linear cost related to order size is the cost of: A. interest B. insurance C. taxes D. receiving E. space Receiving cost is a non-linear cost associated with order size. AACSB: Reflective Thinking Blooms: Understand Difficulty: Hard Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #62 Topic Area: How Much to Order: Economic Order Quantity Models 63. In a two-bin inventory system, the amount contained in the second bin is equal to the: A. ROP B. EOQ C. amount in the first bin D. optimum stocking level E. safety stock The second bin equals the amount needed during lead time in addition to any safety stock. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #63 Topic Area: Reorder Point Ordering 64. When carrying costs are stated as a percentage of unit price, the minimum points on the total cost curves: A. Line up B. Equal zero C. Do not line up D. Cannot be calculated E. Depend on the percentage assigned Curves aren't symmetrical if holding cost differs across price breaks. AACSB: Reflective Thinking Blooms: Understand Difficulty: Hard Learning Objective: 13-08 Describe the quantity discount model and solve typical problems. Stevenson - Chapter 13 #64 Topic Area: How Much to Order: Economic Order Quantity Models 65. Dairy items, fresh fruit and newspapers are items that: A. do not require safety stocks B. cannot be ordered in large quantities C. are subject to deterioration and spoilage D. require that prices be lowered every two days E. have minimal holding costs Deterioration and spoilage increase holding costs. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #65 Topic Area: How Much to Order: Economic Order Quantity Models 66. Which of the following is least likely to be included in order costs? A. processing vendor invoices for payment B. moving delivered goods to temporary storage C. inspecting incoming goods for quantity D. taking an inventory to determine how much is needed E. temporary storage of delivered goods Storage costs are holding costs. AACSB: Reflective Thinking Blooms: Remember Difficulty: Hard Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #66 Topic Area: How Much to Order: Economic Order Quantity Models 67. In an A-B-C system, the typical percentage of the number of items in inventory for A items is about: A. 10 B. 30 C. 50 D. 70 E. 90 Class A items represent a relatively small portion of items. AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 13-05 Describe the A-B-C approach and explain how it is useful. Stevenson - Chapter 13 #67 Topic Area: Requirements for Effective Inventory Management 68. In the A-B-C classification system, items which account for fifteen percent of the total dollar-volume for a majority of the inventory items would be classified as: A. A items B. B items C. C items D. A items plus B items E. B items plus C items These would be class C items. AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 13-05 Describe the A-B-C approach and explain how it is useful. Stevenson - Chapter 13 #68 Topic Area: Requirements for Effective Inventory Management 69. In the A-B-C classification system, items which account for sixty percent of the total dollar-volume for few inventory items would be classified as: A. A items B. B items C. C items D. A items plus B items E. B items plus C items These would be class A items. AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 13-05 Describe the A-B-C approach and explain how it is useful. Stevenson - Chapter 13 #69 Topic Area: Requirements for Effective Inventory Management 70. The purpose of "cycle counting" is to: A. count all the items in inventory B. count bicycles and motorcycles in inventory C. reduce discrepancies between inventory records and actual D. reduce theft E. count 10% of the items each month Cycle counting is intended to improve inventory record accuracy. AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 13-04 Explain the objectives of inventory management. Stevenson - Chapter 13 #70 Topic Area: Requirements for Effective Inventory Management 71. The EOQ model is most relevant for which one of the following? A. ordering items with dependent demand B. determination of safety stock C. ordering perishable items D. determining fixed interval order quantities E. determining fixed order quantities The EOQ is a fixed-quantity approach. AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #71 Topic Area: How Much to Order: Economic Order Quantity Models 72. Which is not a true assumption in the EOQ model? A. Production rate is constant B. Lead time doesn't vary C. No more than 3 items are involved D. Usage rate is constant E. No quantity discounts EOQ can be used across multiple items. AACSB: Reflective Thinking Blooms: Remember Difficulty: Hard Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #72 Topic Area: How Much to Order: Economic Order Quantity Models 73. In a supermarket, a vendor's restocking the shelves every Monday morning is an example of: A. safety stock replenishment B. economic order quantities C. reorder points D. fixed order interval E. blanket ordering This would be a weekly interval model. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-03 Explain periodic and perpetual review systems. Stevenson - Chapter 13 #73 Topic Area: How Much to Order: Fixed-Order-Interval Model 74. A cycle count program will usually require that ‘A' items be counted: A. daily. B. once a week. C. monthly. D. quarterly. E. more frequently than annually. Class A items are counted more frequently. AACSB: Reflective Thinking Blooms: Remember Difficulty: Hard Learning Objective: 13-05 Describe the A-B-C approach and explain how it is useful. Stevenson - Chapter 13 #74 Topic Area: Requirements for Effective Inventory Management 75. A risk avoider would want ______ safety stock. A. Less B. More C. The same D. Zero E. 50% Greater risk aversion is associated with more safety stock. AACSB: Reflective Thinking Blooms: Understand Difficulty: Easy Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #75 Topic Area: Reorder Point Ordering 76. In the basic EOQ model, if annual demand doubles, the effect on the EOQ is: A. It doubles. B. It is four times its previous amount. C. It is half its previous amount. D. It is about 70 percent of its previous amount. E. It increases by about 40 percent. The EOQ does not increase linearly with demand. AACSB: Reflective Thinking Blooms: Understand Difficulty: Hard Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #76 Topic Area: How Much to Order: Economic Order Quantity Models 77. In the basic EOQ model, if lead time increases from five to 10 days, the EOQ will: A. double B. increase, but not double C. decrease by a factor of two D. remain the same E. none of the above The EOQ is independent of lead time. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #77 Topic Area: How Much to Order: Economic Order Quantity Models 78. In the basic EOQ model, an annual demand of 40 units, an ordering cost of $5, and a holding cost of $1 per unit per year will result in an EOQ of: A. 20 B. square root of 200 C. 200 D. 400 E. none of these Use the base EOQ formula. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #78 Topic Area: How Much to Order: Economic Order Quantity Models 79. In the basic EOQ model, if D = 60 per month, S = $12, and H = $10 per unit per month, EOQ is: A. 10 B. 12 C. 24 D. 72 E. 144 Use the base EOQ formula. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #79 Topic Area: How Much to Order: Economic Order Quantity Models 80. In the basic EOQ model, if annual demand is 50, carrying cost is $2, and ordering cost is $15, EOQ is approximately: A. 11 B. 20 C. 24 D. 28 E. 375 Use the base EOQ formula. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #80 Topic Area: How Much to Order: Economic Order Quantity Models 81. Which of the following is not true for Economic Production Quantity model? A. Usage rate is constant. B. Production rate exceeds usage rate. C. Run size exceeds maximum inventory. D. There are no ordering or setup costs. E. Average inventory is one-half maximum inventory. There are ordering or setup costs in the EPQ model. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-07 Describe the economic production quantity model and solve typical problems. Stevenson - Chapter 13 #81 Topic Area: How Much to Order: Economic Order Quantity Models 82. Given the same demand, setup/ordering costs, and carrying costs, the EOQ calculated using incremental replenishment will be ____________ if instantaneous replenishment was assumed: A. greater than the EOQ B. equal to the EOQ C. smaller than the EOQ D. greater than or equal to the EOQ E. smaller than or equal to the EOQ The EPQ will be smaller than the EOQ. AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 13-07 Describe the economic production quantity model and solve typical problems. Stevenson - Chapter 13 #82 Topic Area: How Much to Order: Economic Order Quantity Models 83. The introduction of quantity discounts will cause the optimum order quantity to be: A. smaller B. unchanged C. greater D. smaller or unchanged E. unchanged or greater Quantity discounts cannot make the optimum quantity be smaller. AACSB: Reflective Thinking Blooms: Understand Difficulty: Hard Learning Objective: 13-08 Describe the quantity discount model and solve typical problems. Stevenson - Chapter 13 #83 Topic Area: How Much to Order: Economic Order Quantity Models 84. A fill rate is the percentage of _____ filled by stock on hand. A. Shipments B. Demand C. Inventory D. Safety stock E. Lead time The fill rate is the percentage of demand filled directly from on-hand inventory. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #84 Topic Area: How Much to Order: Fixed-Order-Interval Model 85. In the quantity discount model, with carrying cost stated as a percentage of unit purchase price, in order for the EOQ of the lowest curve to be optimum, it must: A. have the lowest total cost B. be in a feasible range C. be to the left of the price break quantity for that price D. have the largest quantity compared to other EOQ's E. none of the above If not feasible, that quantity will have to be adjusted upward and then total cost calculated. AACSB: Reflective Thinking Blooms: Understand Difficulty: Hard Learning Objective: 13-08 Describe the quantity discount model and solve typical problems. Stevenson - Chapter 13 #85 Topic Area: How Much to Order: Economic Order Quantity Models 86. Which one of the following is not generally a determinant of the reorder point? A. rate of demand B. length of lead time C. lead time variability D. stockout risk E. purchase cost Purchase cost does not enter into reorder point calculations. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #86 Topic Area: Reorder Point Ordering 87. If no variations in demand or lead time exist, the ROP will equal: A. the EOQ B. expected usage during lead time C. safety stock D. the service level E. the EOQ plus safety stock The ROP will be the demand rate times the lead time. AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #87 Topic Area: Reorder Point Ordering 88. If average demand for an inventory item is 200 units per day, lead time is three days, and safety stock is 100 units, the reorder point is: A. 100 units B. 200 units C. 300 units D. 600 units E. 700 units The ROP will be the safety stock added to the product of the demand rate and the lead time. AACSB: Analytic Blooms: Apply Difficulty: Easy Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #88 Topic Area: Reorder Point Ordering 89. Which one of the following is implied by a "lead time" service level of 95 percent? A. Approximately 95 percent of demand during lead time will be satisfied. B. Approximately 95 percent of inventory will be used during lead time. C. The probability is 95 percent that demand during lead time will exactly equal the amount on hand at the beginning of lead time. D. The probability is 95 percent that demand during lead time will not exceed the amount on hand at the beginning of lead time. E. none of the above A stock only occurs if demand during lead time exceeds the ROP. AACSB: Reflective Thinking Blooms: Understand Difficulty: Hard Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #89 Topic Area: Reorder Point Ordering 90. Which one of the following is implied by an "annual" service level of 95 percent? A. Approximately 95 percent of demand during lead time will be satisfied. B. The probability is 95 percent that demand will exceed supply during lead time. C. The probability is 95 percent that demand will equal supply during lead time. D. The probability is 95 percent that demand will not exceed supply during lead time. E. None of the above. The annual service level is usually greater than the cycle service level, and thus the risk of a stockout during lead time is much smaller than 5 percent. AACSB: Reflective Thinking Blooms: Understand Difficulty: Hard Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #90 Topic Area: Reorder Point Ordering 91. Daily usage is exactly 60 gallons per day. Lead time is normally distributed with a mean of 10 days and a standard deviation of 2 days. What is the standard deviation of demand during lead time? A. 60 x 2 B. 60 times the square root of 2 C. 60 times the square root of 10 D. 60 x 10 E. none of the above The standard deviation of demand during lead time is the square root of squared demand times the squared standard deviation of lead time. AACSB: Analytic Blooms: Apply Difficulty: Hard Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #91 Topic Area: Reorder Point Ordering 92. Lead time is exactly 20 days long. Daily demand is normally distributed with a mean of 10 gallons per day and a standard deviation of 2 gallons. What is the standard deviation of demand during lead time? A. 20 x 2 B. 20 x 10 C. 2 times the square root of 20 D. 2 times the square root of 10 E. none of the above The standard deviation of demand during lead time equals the daily standard deviation of demand times the square root of the lead time. AACSB: Analytic Blooms: Apply Difficulty: Hard Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #92 Topic Area: Reorder Point Ordering 93. All of the following are possible reasons for using the fixed order interval model except: A. Supplier policy encourages use. B. Grouping orders can save in shipping costs. C. The required safety stock is lower than with an EOQ/ROP model. D. It is suited to periodic checks of inventory levels rather than continuous monitoring. E. Continuous monitoring is not practical. Safety stock is higher in a fixed order interval model. AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 13-03 Explain periodic and perpetual review systems. Stevenson - Chapter 13 #93 Topic Area: How Much to Order: Fixed-Order-Interval Model 94. Which of these products would be most apt to involve the use of a single-period model? A. gold coins B. hammers C. fresh fish D. calculators E. frozen corn The perishability of fresh fish makes it more appropriate for a single-period model. AACSB: Reflective Thinking Blooms: Understand Difficulty: Easy Learning Objective: 13-10 Describe situations in which the singleperiod model would be appropriate; and solve typical problems. Stevenson - Chapter 13 #94 Topic Area: The Single-Period Model 95. In a single-period model, if shortage and excess costs are equal, then the optimum service level is: A. 0 B. .33 C. .50 D. .67 E. none of these The ratio of shortage cost to shortage plus excess cost is 0.5. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems. Stevenson - Chapter 13 #95 Topic Area: The Single-Period Model 96. In a single-period model, if shortage cost is four times excess cost, then the optimum service level is ___ percent. A. 100 B. 80 C. 60 D. 40 E. 20 The ratio of shortage cost to shortage plus excess cost is 0.8. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems. Stevenson - Chapter 13 #96 Topic Area: The Single-Period Model 97. In the single-period model, if excess cost is double shortage cost, the approximate stockout risk, assuming an optimum service level, is ___ percent. A. 100 B. 67 C. 50 D. 33 E. 5 The ratio of shortage cost to shortage plus excess cost is 0.67. AACSB: Analytic Blooms: Apply Difficulty: Hard Learning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems. Stevenson - Chapter 13 #97 Topic Area: The Single-Period Model 98. If, in a single-period inventory situation, the probabilities of demand being 1, 2, 3, or 4 units are .3, .3, .2, and .2, respectively. If two units are stocked, what is the probability of selling both of them? A. .5 B. .6 C. .7 D. .8 E. none of these Both units will be sold if demand is for 2, 3 or 4 units. AACSB: Analytic Blooms: Apply Difficulty: Hard Learning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems. Stevenson - Chapter 13 #98 Topic Area: The Single-Period Model 99. The management of supply chain inventories focuses on: A. internal inventories B. external inventories C. both internal and external inventories D. safety stock elimination E. optimizing reorder points Supply chain inventory involves both internal and external inventories. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-01 Define the term inventory; list the major reasons for holding inventories; and list the main requirements for effective inventory management. Stevenson - Chapter 13 #99 Topic Area: Operations Strategy 100. An operations strategy for inventory management should work towards: A. increasing lot sizes B. decreasing lot sizes C. increasing safety stocks D. decreasing service levels E. increasing order quantities If lot sizes can be reduced, operations become leaner. AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 13-04 Explain the objectives of inventory management. Stevenson - Chapter 13 #100 Topic Area: Operations Strategy 101. Cycle stock inventory is intended to deal with ________. A. excess costs B. shortage costs C. stockouts D. expected demand E. quantity discounts Cycle stock is intended to deal with expected demand, while safety stock is intended to reduce stockouts resulting from demand uncertainty. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-01 Define the term inventory; list the major reasons for holding inventories; and list the main requirements for effective inventory management. Stevenson - Chapter 13 #101 Topic Area: Inventory Ordering Policies 102. An operations strategy which recognizes high carrying costs and reduces ordering costs will result in: A. unchanged order quantities B. slightly decreased order quantities C. greatly decreased order quantities D. slightly increased order quantities E. greatly increased order quantities Processes will be leaned leading to smaller order quantities. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-04 Explain the objectives of inventory management. Stevenson - Chapter 13 #102 Topic Area: Operations Strategy 103. The need for safety stocks can be reduced by an operations strategy which: A. increases lead time B. increases lead time variability C. increases lot sizes D. decreases ordering costs E. decreases lead time variability Reduced lead time variability will reduce the size of safety stocks. AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #103 Topic Area: Operations Strategy 104. If average demand for an item is 20 units per day, safety stock is 50 units, and lead time is four days, the ROP will be: A. 20 B. 50 C. 70 D. 80 E. 130 Multiply the demand rate by the lead time and add the safety stock. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #104 Topic Area: Reorder Point Ordering 105. With an A-B-C system, an item that had a high demand but a low annual dollar volume would probably be classified as: A. A B. B C. C D. none of these Low dollar volume items tend to be classified as C items. AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 13-05 Describe the A-B-C approach and explain how it is useful. Stevenson - Chapter 13 #105 Topic Area: Requirements for Effective Inventory Management 106. The fixed order interval model would be most likely to be used for this situation: A. A company has switched from mass production to lean production. B. Production is done in batches. C. Spare parts are ordered when a new machine is purchased. D. Grouping orders can save shipping costs. E. none of these If ordering costs can be saved by grouping orders, the fixed order interval model is especially attractive. AACSB: Reflective Thinking Blooms: Understand Difficulty: Hard Learning Objective: 13-03 Explain periodic and perpetual review systems. Stevenson - Chapter 13 #106 Topic Area: How Much to Order: Fixed-Order-Interval Model 107. Which item would be least likely to be ordered under a fixed order interval system? A. textbooks at a college bookstore B. auto parts at an assembly plant C. cards at a gift shop D. canned peas at a supermarket E. none of these Auto parts at an assembly plant would be unlikely candidates for a fixed order interval system. AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 13-03 Explain periodic and perpetual review systems. Stevenson - Chapter 13 #107 Topic Area: How Much to Order: Fixed-Order-Interval Model 108. Which one of these would not be a factor in determining the reorder point? A. the EOQ B. the lead time C. the variability of demand D. the demand or usage rate E. all are factors The ROP is independent of the EOQ. AACSB: Reflective Thinking Blooms: Understand Difficulty: Hard Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #108 Topic Area: Reorder Point Ordering 109. A car rental agency uses 96 boxes of staples a year. The boxes cost $4 each. It costs $10 to order staples, and carrying costs are $0.80 per box on an annual basis. Determine: (A) the order quantity that will minimize the sum of ordering and holding boxes of staples (B) the annual cost of ordering and carrying the boxes of staples D = 96 boxes/year S = $10 H = $.80 per box-year Feedback: Use the EOQ and the total annual cost formula. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #109 Topic Area: How Much to Order: Economic Order Quantity Models 110. A service garage uses 120 boxes of cleaning cloths a year. The boxes cost $6 each. Ordering cost is $3 and holding cost is 10 percent of purchase cost per unit on an annual basis. Determine: (A) The economic order quantity (B) The total cost of carrying the cloths (excluding purchase price) (C) The average inventory D = 120 boxes per year S = $3 H = .10($6) = $.60 per box-year A) B) C) Feedback: Use the EOQ, total annual cost and average inventory formulas. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #110 Topic Area: How Much to Order: Economic Order Quantity Models 111. A shop that makes candles offers a scented candle, which has a monthly demand of 360 boxes. Candles can be produced at a rate of 36 boxes per day. The shop operates 20 days a month. Assume that demand is uniform throughout the month. Setup cost is $60 for a run, and holding cost is $2 per box on a monthly basis. Determine the following: (A) the economic run size (B) the maximum inventory (C) the number of days in a run The daily usage rate (u) is 18 boxes. The daily production rate (p) is 36 boxes. A) B) C) Feedback: Use the EPQ and Imax formulas. Days per run is the EPQ divided by the production rate. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-07 Describe the economic production quantity model and solve typical problems. Stevenson - Chapter 13 #111 Topic Area: How Much to Order: Economic Order Quantity Models 112. Estimated demand for gold-filled lockets at Sam's Bargain Jewelry and Housewares is 2,420 lockets a year. Manager Veronica Winters has indicated that ordering cost is $45, and that the following price schedule applies: 1 to 599 lockets, $.90 each; 600 to 1,199 lockets, $.80 each; and 1,200 or more, $.75 each. What order size will minimize total cost if carrying cost is $.18 per locket on an annual basis? D = 2,420 lockets per year S = $45 H = $.18 per locket Hence, the most attractive order quantity is 1,200 units. Feedback: Since the first calculated quantity is in the range of feasibility for $.80 per unit, compare the total cost of 1,100 @ $.80 each with the total cost of 1,200 @ $.75 each. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-08 Describe the quantity discount model and solve typical problems. Stevenson - Chapter 13 #112 Topic Area: How Much to Order: Economic Order Quantity Models 113. Suppose that you are the manager of a production department that uses 400 boxes of rivets per year. The supplier quotes you a price of $8.50 per box for an order size of 199 boxes or less, a price of $8.00 per box for orders of 200 to 999 boxes, and a price of $7.50 per box for an order of 1,000 or more boxes. You assign a holding cost of 20 percent of the price to this inventory. What order quantity would you use if the objective is to minimize total annual costs of holding, purchasing, and ordering? Assume ordering cost is $80/order. D = 400 boxes per year S = $80 H = .20P Thus, the best choice is to buy 200 per order at a price of $8.00 per unit. Feedback: The lowest curve with its minimum in the feasible range is $8.00, where Q = 200. Hence, compare the total cost of 200 @ $8.00 each and the total cost of 1,000 @ $7.50 each. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-08 Describe the quantity discount model and solve typical problems. Stevenson - Chapter 13 #113 Topic Area: How Much to Order: Economic Order Quantity Models 114. The operator of a concession at a downtown location estimates that he will sell 400 bags of circus peanuts during a month. Carrying costs are 17 percent of unit price and ordering cost is $22. The price schedule for bags of peanuts is: 1 to 199, $1.00 each; 200 to 499, $.94 each; and 500 or more $.87 each. What order size would be most economical? D = 400 bags per year S = $22 H = .17P Thus, the best choice is to buy 500 per order at a price of $.87 per unit. Feedback: The lowest curve with a feasible EOQ is the $.94 curve. Hence, compare total cost of 332 bags @ $.94 each with the total cost of 500 @ $.87 each. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-08 Describe the quantity discount model and solve typical problems. Stevenson - Chapter 13 #114 Topic Area: How Much to Order: Economic Order Quantity Models 115. A dry cleaning firm uses an average of 20 gallons of cleaning fluid a day. Usage tends to be normally distributed with a standard deviation of two gallons per day. Lead time is four days, and the desired service level is 92 percent. What amount of safety stock is appropriate if a fixed order size of 600 gallons is used? = 20 gallons per day; = 2 gallons per day LT = 4 days SL = 92 percent (Z = 1.41) Feedback: Multiply an appropriate Z-value by the standard deviation of demand and the square root of the lead time. AACSB: Analytic Blooms: Apply Difficulty: Hard Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #115 Topic Area: Reorder Point Ordering 116. Suppose that usage of cooking oil at Harry's Fish Fry is normally distributed with an average of 15 gallons/day and a standard deviation of two gallons/day. Harry has just fired the manager and taken over operating the restaurant himself. Harry has asked you to help him decide how to reorder cooking oil in order to achieve a service level which is seven times the risk of stockout (7/8). Lead time is eight days. Assume that cooking oil can be ordered as needed. = 15 gallons per day; = 2 gallons per day LT = 8 days SL = 7/8 = 87.5 percent (Z = 1.15) For the continuous review system, the correct reorder point should be: Feedback: Use the basic ROP formula. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #116 Topic Area: Reorder Point Ordering 117. A bakery's use of corn sweetener is normally distributed with a mean of 80 gallons per day and a standard deviation of four gallons per day. Lead time for delivery of the corn sweetener is normal with a mean of six days and a standard deviation of two days. If the manager wants a service level of 99 percent, what reorder point should be used? For a 99 percent service level, the appropriate z-value is 2.33. Given this, the reorder point should be: Feedback: Use the basic ROP formula. AACSB: Analytic Blooms: Apply Difficulty: Hard Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #117 Topic Area: Reorder Point Ordering 118. A manager reorders lubricant when the amount on-hand reaches 422 pounds. Average daily usage is 45 pounds, which is normally distributed with a standard deviation of three pounds per day. Lead time is nine days. What is the risk of a stockout? = 45 lbs. per day; = 3 lbs. per day; LT = 9 days If the ROP is 422, this means the safety stock is equal to 17 units. If the safety stock equals 17 units, then solving for z, we get A z-value of 1.89 implies that the probability of a stockout is .0294, so the risk of a stockout is about 3 percent. Feedback: Given the reorder point, solve for Z, then interpret the probability associated with that Z. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #118 Topic Area: Reorder Point Ordering 119. Given the following information: Order quantity = 300; = 20 units; desired lead time service level = .86. Find: (A) the expected number of units short per cycle (B) the annual service level A) E(n) = E(z) ; for a lead time service level of .8599, E(z) = .071. Thus, E(n) = .071(20 units) = 1.42. B) 1 - SLannual = = .0047 Solving for SLannual, we get SLannual = 1 - .0047 = .9953 or 99.53% Feedback: Use cycle and annual service level approaches. AACSB: Analytic Blooms: Apply Difficulty: Hard Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #119 Topic Area: Reorder Point Ordering 120. A company can produce a part it uses in an assembly operation at the rate of 50 an hour. The company operates eight hours a day, 300 days a year. Daily usage of the part is 300 parts. The company uses the part every day. The run size is 6,000 parts. The annual holding cost is $2 per unit, and setup cost is $100. (A) How many runs per year will there be? (B) While production is occurring, how many parts per day are being added to inventory? (C) Assuming that production begins when there are no parts on hand, what is the maximum number of parts in inventory? (D) The machine is dedicated to this product. Every so often, preventive maintenance, which requires six working days, must be performed on it. Does this interrupt production cycles, or is there enough time between cycles to perform the maintenance? Explain. (A) Annual demand = (300 parts/day) x (300 days/yr.) = 90,000 parts/yr. Annual demand/Run quantity = 90000/6000 = 15 runs/yr. (B) Inventory buildup = p - u = 400 - 300 = 100 parts/day. (C) Production takes 15 days: 6000 parts/400 parts/day = 15 days. Buildup is 100 parts/day x 15 days = 1500 parts. (D) Usage is 300 parts/day for 6 days = 1800 parts, but maximum inventory is only 1500 parts. Yes, it would interrupt production. Feedback: Use EPQ formulas and interpret. AACSB: Analytic Blooms: Apply Difficulty: Hard Learning Objective: 13-07 Describe the economic production quantity model and solve typical problems. Stevenson - Chapter 13 #120 Topic Area: How Much to Order: Economic Order Quantity Models 121. The injection molding department of a company uses 40 pounds of a powder a day. Inventory is reordered when the amount on hand is 240 pounds. Lead time averages five days. It is normally distributed and has a standard deviation of two days. What is the probability of a stockout during lead time? = 5 days; = 2 As on average 200 pounds are needed during lead time, a ROP of 240 pounds implies a safety stock of 40 pounds. With , the z-value is 0.5. This implies a probability of a stockout of .3085. Feedback: Solve for Z, and then find the cumulative probability associated with that Z. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #121 Topic Area: Reorder Point Ordering 122. A shop owner uses a reorder point approach to restocking a certain raw material. Lead time is six days. Usage of the material during lead time is normally distributed with a mean of 42 pounds and a standard deviation of 4 pounds. When should the raw material be reordered if the acceptable risk of a stockout is 3%? LT = 6 days Expected demand during lead time = 42 pounds Standard deviation of lead-time demand = 4 pounds z = 1.88 for SL of 1.00 - .03 ROP = expected demand during lead time + z = 252 + 1.88(4) = 259.52 pounds. Feedback: Use the basic ROP formula. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #122 Topic Area: Reorder Point Ordering 123. The manager of a bakery orders three 'cake-to-go' wedding cakes every Saturday to accommodate last minute purchases. Demand for the cakes can be described by a Poisson distribution that has a mean of 2. The cakes cost $10 each to prepare, and they sell for $26 each. Any cakes that haven't been sold by the end of the day are sold for half price the next day. Usually, half of those are sold and the rest are tossed. What stocking level would be appropriate? Cs = $26 - $10 = $16 Ce = $10 - .5($13) = $3.50 SL = = .82 For Poisson with mean = 2.0, this falls between .677 and .857. Therefore, stock 3 cakes. Feedback: Stock until the cumulative probability of demand first exceeds this ratio. AACSB: Analytic Blooms: Apply Difficulty: Hard Learning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems. Stevenson - Chapter 13 #123 Topic Area: Operations Strategy 124. A manager has just received a revised price schedule from a vendor. What order quantity should the manager use in order to minimize total costs? Annual Demand is 120 units, ordering cost is $8, and annual carrying cost is $1 per unit. Because this is in the 40-59 range, compare TC of Q = 44 @ $13, Q = 60 @ $12, and Q = 90 @ $11: Feedback: The EOQ for the 40-59 range is the lowest feasible EOQ. Compare this quantity's total cost to the total cost of minimum quantities in the lower price ranges. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-08 Describe the quantity discount model and solve typical problems. Stevenson - Chapter 13 #124 Topic Area: How Much to Order: Economic Order Quantity Models A manufacturer is contemplating a switch from buying to producing a certain item. Setup cost would be the same as ordering cost. The production rate would be about double the usage rate. Stevenson - Chapter 13 125. Compared to the EOQ, the economic production quantity would be approximately: A. the same B. 20 percent larger C. 40 percent larger D. 20 percent smaller E. 40 percent smaller The EPQ will be larger than the EOQ. AACSB: Reflective Thinking Blooms: Understand Difficulty: Hard Learning Objective: 13-07 Describe the economic production quantity model and solve typical problems. Stevenson - Chapter 13 #125 Topic Area: How Much to Order: Economic Order Quantity Models 126. Compared to the EOQ, the maximum inventory would be approximately: A. 70 percent higher B. 30 percent higher C. the same D. 30 percent lower E. 70 percent lower Maximum inventory is smaller under an EPQ than an EOQ. AACSB: Reflective Thinking Blooms: Understand Difficulty: Hard Learning Objective: 13-07 Describe the economic production quantity model and solve typical problems. Stevenson - Chapter 13 #126 Topic Area: How Much to Order: Economic Order Quantity Models The manager of the Quick Stop Corner Convenience Store (which never closes) sells four cases of Stein beer each day. Order costs are $8.00 per order, and Stein beer costs $.80 per six-pack (each case of Stein beer contains four six-packs). Orders arrive three days from the time they are placed. Daily holding costs are equal to five percent of the cost of the beer. Stevenson - Chapter 13 127. At what point should he reorder Stein beer? A. 0 cases remaining B. 4 cases remaining C. 12 cases remaining D. 16 cases remaining E. 20 cases remaining Use the basic reorder point with no demand uncertainty. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #127 Topic Area: How Much to Order: Economic Order Quantity Models 128. If he were to order 16 cases of Stein beer at a time, what would be the length of an order cycle? A. 0.25 days B. 3 days C. 1 day D. 4 days E. 20 days Divide the order quantity by the demand rate to get the length of an order cycle. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #128 Topic Area: How Much to Order: Economic Order Quantity Models 129. If he were to order 16 cases of Stein beer at a time, what would be the average inventory level? A. 4 cases B. 12 cases C. 8 cases D. 20 cases E. 16 cases Divide the order quantity by two. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #129 Topic Area: How Much to Order: Economic Order Quantity Models 130. If he were to order 16 cases of Stein beer at a time, what would be the daily total inventory costs, EXCLUDING the cost of the beer? A. $2.00 B. $4.00 C. $1.28 D. $3.28 E. $2.56 Multiply the average inventory by the holding cost. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #130 Topic Area: How Much to Order: Economic Order Quantity Models 131. What is the economic order quantity for Stein beer? A. 8 cases B. 11 cases C. 14 cases D. 20 cases E. 32 cases Use the basic EOQ formula. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #131 Topic Area: How Much to Order: Economic Order Quantity Models Ann Chovies, owner of the Perfect Pasta Pizza Parlor, uses 20 pounds of pepperoni each day in preparing pizzas. Order costs for pepperoni are $10.00 per order, and carrying costs are 4 cents per pound per day. Lead time for each order is 3 days, and the pepperoni itself costs $3.00 per pound. Stevenson - Chapter 13 132. At what point should she reorder pepperoni? A. 20 pounds remaining B. 40 pounds remaining C. 60 pounds remaining D. 80 pounds remaining E. 100 pounds remaining Multiply the demand rate by the lead time. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #132 Topic Area: Reorder Point Ordering 133. If she were to order 80 pounds of pepperoni at a time, what would be the length of an order cycle? A. 0 days B. 0.25 days C. 3 days D. 4 days E. 5 days Divide the order quantity by the demand rate. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #133 Topic Area: How Much to Order: Economic Order Quantity Models 134. If she were to order 80 pounds of pepperoni at a time, what would be the average inventory level? A. 20 pounds B. 40 pounds C. 60 pounds D. 80 pounds E. 100 pounds Divide the order quantity by two. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #134 Topic Area: How Much to Order: Economic Order Quantity Models 135. If she were to order 80 pounds of pepperoni at a time, what would be the total daily costs, including the cost of the pepperoni? A. $60.00 B. $63.20 C. $64.00 D. $64.10 E. $65.00 Add the holding cost to the ordering cost and the cost of the pepperoni. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #135 Topic Area: How Much to Order: Economic Order Quantity Models 136. What is the economic order quantity for pepperoni? A. 20 pounds B. 40 pounds C. 60 pounds D. 80 pounds E. 100 pounds Use the basic EOQ formula. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #136 Topic Area: How Much to Order: Economic Order Quantity Models The Operations Manager for Shadyside Savings & Loan orders cash from her home office for her very popular "BIG BUCKS" automated teller machine, which only dispenses $100 bills. She estimates that this machine dispenses an average of 12,500 bills per month, and that carrying a bill in inventory costs 10 percent of its value annually. She knows that each order for these bills costs $300 for clerical and armored car delivery costs, and that order lead time is six days. Stevenson - Chapter 13 137. Assuming a thirty-day month, at what point should bills be reordered? A. 0 bills remaining B. 417 bills remaining C. 2,500 bills remaining D. 10,000 bills remaining E. 12,500 bills remaining Multiply the demand rate by the lead time. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #137 Topic Area: Reorder Point Ordering 138. Assuming a thirty-day month, if she were to order 6,000 bills at a time, what would be the length of an order cycle? A. 0.48 days B. 2.08 days C. 6 days D. 8.4 days E. 14.4 days Divide the order quantity by the demand rate. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #138 Topic Area: How Much to Order: Economic Order Quantity Models 139. If she were to order 6,000 bills at a time, what would be the dollar value of the average inventory level? A. $3,000 B. $6,000 C. $12,500 D. $300,000 E. $600,000 Divide the order quantity by two. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #139 Topic Area: How Much to Order: Economic Order Quantity Models 140. If she were to order 6,000 bills at a time, what would be the average monthly total costs, EXCLUDING the value of the bills? A. $625 B. $1,250 C. $2,500 D. $3,125 E. $37,500 Add the ordering and holding costs. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #140 Topic Area: How Much to Order: Economic Order Quantity Models 141. What is the economic order quantity? A. 600 bills B. 3,000 bills C. 949 bills D. 6,215 bills E. 12,500 bills Use the basic EOQ formula. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #141 Topic Area: How Much to Order: Economic Order Quantity Models Given the following data for a particular inventory item: Stevenson - Chapter 13 142. What is the economic order quantity for this item? 2,000 units Feedback: Use the basic EOQ formula. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #142 Topic Area: How Much to Order: Economic Order Quantity Models 143. For the economic order quantity, what is the length of an order cycle? 4 weeks Feedback: Divide the order quantity by the demand rate. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #143 Topic Area: How Much to Order: Economic Order Quantity Models 144. For the economic order quantity, what is the reorder point? 1,500 units Feedback: Multiply the lead time by the demand rate. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #144 Topic Area: Reorder Point Ordering 145. For the economic order quantity, what is the average inventory level? 1,000 units Feedback: Divide the order quantity by two. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #145 Topic Area: How Much to Order: Economic Order Quantity Models 146. For the economic order quantity, what are average weekly ordering costs? $10 Feedback: Divide the demand rate by the order quantity, then multiply by per-order cost. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #146 Topic Area: How Much to Order: Economic Order Quantity Models 147. For the economic order quantity, what are average weekly carrying costs? $10 Feedback: Divide the order quantity by two, then multiply by the periodic holding cost. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #147 Topic Area: How Much to Order: Economic Order Quantity Models 148. For the economic order quantity, what are average weekly total costs, including the cost of the inventory item? $270 Feedback: Multiply the demand rate by the cost of the item, then add to the holding and ordering costs. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #148 Topic Area: How Much to Order: Economic Order Quantity Models The materials manager for a billiard ball maker must periodically place orders for resin, one of the raw materials used in producing billiard balls. She knows that manufacturing uses resin at a rate of 50 kilograms each day, and that it costs $.04 per day to carry a kilogram of resin in inventory. She also knows that the order costs for resin are $100 per order, and that the lead time for delivery is four (4) days. Stevenson - Chapter 13 149. At what point should resin be reordered? A. 0 kilograms remaining B. 50 kilograms remaining C. 200 kilograms remaining D. 400 kilograms remaining E. 500 kilograms remaining Multiply the demand rate by the lead time. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #149 Topic Area: Reorder Point Ordering 150. If order size was 1,000 kilograms of resin, what would be the length of an order cycle? A. 0.05 days B. 4 days C. 16 days D. 20 days E. 50 days Divide the order quantity by the demand rate. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #150 Topic Area: How Much to Order: Economic Order Quantity Models 151. If the order size was 1,000 kilograms of resin, what would be the average inventory level? A. 50 kilograms B. 200 kilograms C. 500 kilograms D. 800 kilograms E. 1,000 kilograms Divide the order quantity by two. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #151 Topic Area: How Much to Order: Economic Order Quantity Models 152. If the order size was 1,000 kilograms of resin, what would be the daily total inventory costs, EXCLUDING the cost of the resin? A. $5 B. $10 C. $20 D. $25 E. $40 Multiply the average inventory by the holding cost. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #152 Topic Area: How Much to Order: Economic Order Quantity Models 153. What is the economic order quantity for resin? A. 50 kilograms B. 100 kilograms C. 250 kilograms D. 500 kilograms E. 1,000 kilograms Use the basic EOQ formula. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. Stevenson - Chapter 13 #153 Topic Area: How Much to Order: Economic Order Quantity Models 154. A firm stocks a seasonal item that it buys for $22/unit and sells for $29 unit. During the season, daily demand can be described using a Poisson distribution with a mean of 2.4. Because of the nature of the item, units remaining at the close of business each day must be removed at a cost of $2 each. What is the optimum stocking level, and what is the effective service level? Cs = $29 - $22 = $7 Ce = $22 + $2 = $24 For a Poisson distributed variable with a mean of 2.4, this SL falls between the cumulative probabilities associated with levels of 0 and 1 unit. Hence, stock 1 unit. Feedback: At that stocking level, the (effective) service level is .308. AACSB: Analytic Blooms: Apply Difficulty: Hard Learning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems. Stevenson - Chapter 13 #154 Topic Area: The Single-Period Model 155. Joe's Coffee Shoppe has fresh doughnuts delivered each morning. Daily demand for plain doughnuts is approximately normal with a mean of 200 and a standard deviation of 15. Joe pays $1.20 per dozen and has a standing order for 16 dozen. Joe and the staff eat any leftovers. What is the implied shortage cost? = 15 Ce = $1.20 per dozen The stocking level is 12(16) = 192, which implies a service level of .2981. If .2981 = and Ce $1.20 per dozen, solving for Cs leads to an estimated Cs of $.51 per dozen. Feedback: Given the implied service level and the excess cost, solve for the implied shortage cost. AACSB: Analytic Blooms: Apply Difficulty: Hard Learning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems. Stevenson - Chapter 13 #155 Topic Area: The Single-Period Model 156. A restaurant prepares Peking Duck daily at a cost of $18 per duck. Each duck generates revenue of $47 if sold. Demand for Peking Duck can be described by a Poisson distribution with a mean of 4.2 ducks per day. Unsold ducks at the end of each day are converted to duck soup at an additional cost of $5 over and above the resulting value as soup. How many ducks should be prepared each day? SL = = .5577 For a Poisson distributed variable with a mean of 4.2, this SL falls between the cumulative probabilities associated with levels of 3 and 4 units. Hence, stock four ducks. Feedback: Stocking four ducks leads to an (effective) service level of .59. AACSB: Analytic Blooms: Apply Difficulty: Hard Learning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems. Stevenson - Chapter 13 #156 Topic Area: The Single-Period Model 157. A machine is expected to use approximately three spare parts during its useful life. The spares cost $200 each and have no salvage value or other use. The manager has ordered five spares. Assuming a Poisson usage rate, what range of shortage cost is implied? Ce = $200 Mean = 3 (Poisson) Cs = ? Assuming a Poisson-distributed variable with a mean of 3, if stocking 5 units is optimal, this implies that the optimal service level must be between .815 and .916 Thus, Solving for Cs yields a range of Cs from $881.08 to $2,180.95. Feedback: Solve for shortage cost that leads to a service level falling within the range (inclusive) of 0.815 and 0.916. AACSB: Analytic Blooms: Apply Difficulty: Hard Learning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems. Stevenson - Chapter 13 #157 Topic Area: The Single-Period Model 158. A manager intends to order a new machine and must now decide on the number of spare parts to order along with the machine. The parts cost $400 each and have no salvage value. The manager has compiled a frequency distribution for the probable usage of spare parts, as shown. For what range of shortage costs would stocking one spare part constitute an optimal decision? Number of Ce = $400 In order for a stocking level of one part to be optimal, the service level must fall in the range .08 to .38 (see frequency distribution). Thus, Setting the service level ratio equal to .08 yields Cs = $34.78. Setting the service level ratio equal to .38 yields Cs = $245.16. Hence the range of shortage costs for a stocking level of one to be optimal is $34.78 to $245.16. Feedback: Solve for shortage cost that leads to a service level falling within the range (inclusive) of 0.08 and 0.38. AACSB: Analytic Blooms: Apply Difficulty: Hard Learning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems. Stevenson - Chapter 13 #158 Topic Area: The Single-Period Model The Corner Newsstand has demand for a certain weekly magazine that can be approximated by a Poisson distribution with a mean of 9.0. Magazines are purchased for $1.50. Stevenson - Chapter 13 159. If unsold copies can be returned for half credit and the owner stocks ten copies, what is the implied range of shortage cost? Ce = $.75 Given Poisson-distributed demand with a mean of 9.0, the optimum service level must be between .587 and .706. Service level of .587 implies Cs = $1.07 Service level of .706 implies Cs = $1.80 Thus the range of shortage costs implied by stocking ten copies is $1.07 to $1.80. Feedback: Solve for shortage cost that leads to a service level falling within the range (inclusive) of 0.587 and 0.706. AACSB: Analytic Blooms: Apply Difficulty: Hard Learning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems. Stevenson - Chapter 13 #159 Topic Area: The Single-Period Model 160. If unsold copies must be destroyed and copies sell for $4.00 each, find the optimum stocking level. Ce = $1.50 Cs = $4.00 - 1.50 = $2.50 Given Poisson-distributed demand with a mean of 9.0, this SL falls between 9 and 10 units. Thus, we would stock 10 copies. Feedback: Compare the service level ratio to the cumulative distribution of demand with Poisson-distributed demand with a mean of 9.0. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems. Stevenson - Chapter 13 #160 Topic Area: The Single-Period Model 161. If unsold copies can be returned for half credit and copies sell for $4.25 each, find the optimal stocking level. Ce = $1.50/2 = $.75 Cs = $4.25 - 1.50 = $2.75 Given Poisson-distributed demand with a mean of 9.0, this SL falls between 10 and 11 units. Stock 11 copies of each issue. Feedback: Compare the service level ratio to the cumulative distribution of demand with Poisson-distributed demand with a mean of 9.0. AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems. Stevenson - Chapter 13 #161 Topic Area: The Single-Period Model 162. Demand for a component averages 80 units per week, with a weekly standard deviation of demand of 14 units. The current supplier of this component offers a four-week lead time. Stockout risk is to be kept at 8%. Assume that it costs $50 to hold one unit in inventory for a year. Suppose the annual cost for the items would be $500 higher if they were purchased from another vendor, but that vendor would offer a two-week lead time. Would it be better to go with the more-expensive but more-responsive vendor? Yes, using the second vendor would be cheaper overall. Feedback: Required safety stock for the cheaper-but-slower vendor would be approximately 39 units. Required safety stock for the more-expensive-but-faster vendor would be approximately 28 units. The $550 reduction in annual holding costs would more than offset the greater expense in purchase costs. AACSB: Analytic Blooms: Apply Difficulty: Hard Learning Objective: 13-09 Describe reorder point models and solve typical problems. Stevenson - Chapter 13 #162 Topic Area: Reorder Point Ordering ch23 Summary Category # of Questions AACSB: Analytic 65 AACSB: Reflective Thinking 97 Blooms: Apply 65 Blooms: Remember 76 Blooms: Understand 21 Difficulty: Easy 24 Difficulty: Hard 41 Difficulty: Medium 97 Learning Objective: 13-01 Define the term inventory; list the major reasons for holding inventories; and list the main requirements for effective inventory management. 12 Learning Objective: 13-02 Discuss the nature and importance of service inventories. 1 Learning Objective: 13-03 Explain periodic and perpetual review systems. 7 Learning Objective: 13-04 Explain the objectives of inventory management. 10 Learning Objective: 13-05 Describe the A-B-C approach and explain how it is useful. 7 Learning Objective: 13-06 Describe the basic EOQ model and its assumptions and solve typical problems. 51 Learning Objective: 13-07 Describe the economic production quantity model and solve typical problems. 6 Learning Objective: 13-08 Describe the quantity discount model and solve typical problems. 12 Learning Objective: 13-09 Describe reorder point models and solve typical problems. 37 Learning Objective: 13-10 Describe situations in which the single period model would be appropriate; and solve typical problems. 19 Learning Objective: 13-10 Describe situations in which the singleperiod model would be appropriate; and solve typical problems. 1 Stevenson - Chapter 13 169 Topic Area: How Much to Order: Economic Order Quantity Models 68 Topic Area: How Much to Order: Fixed-Order-Interval Model 8 Topic Area: Introduction 1 Topic Area: Inventory Ordering Policies 1 Topic Area: Operations Strategy 7 Topic Area: Reorder Point Ordering 36 Topic Area: Requirements for Effective Inventory Management 12 Topic Area: The Nature and Importance of Inventories 11 Topic Area: The Single-Period Model 19 |
Which one of the following is implied by a lead time service level of 95 percent?
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