3/13/23, 10:07 PM
Part_2 - Exam Plan - Assessment Review
Question 1
2.B.4.y
inv.m.tb.008_2205
LOS: 2.B.4.y
Lesson Reference: Inventory Management
Difficulty: hard
Bloom Code: 4
A shirt making factory uses the economic order quantity (EOQ) model to plan its ordering quantity for
its principal raw material. In the recent times, due to expansion of the manufacturing facilities, the
annual demand for the material has increased by 50%.
What would be the effect of the above increase on the EOQ?
The EOQ will remain unchanged.
Your Answer
The EOQ will increase by more than 50%.
Correct
The EOQ will increase by less than 50%.
The EOQ will increase by exactly 50%.
Rationale
 The EOQ will remain unchanged.
This answer is incorrect. The EOQ will increase by less than 50%, in case the annual demand for
the raw materials increases by 50%.
Rationale
 The EOQ will increase by more than 50%.
This answer is incorrect. The EOQ will increase by less than 50%, in case the annual demand for
the raw materials increases by 50%.
Rationale
 The EOQ will increase by less than 50%.
Correct. Let us understand with the help of an example.
Assuming,
Consumption of raw materials per annum: 10,000 kilograms
Cost of placing one order: $50
Cost of purchasing one kilogram of raw material: $2
Storage cost: 8% of the purchase price
EOQ = √[(2 × Ordering cost per order × Annual demand) ÷ Holding cost of one unit]
EOQ = √[(2 × 50 × 10,000) ÷ (2 × 8%)] = 2,500 kilograms
Revised Annual demand = 10,000 × 1.5 = 15,000 kilograms
Revised EOQ = √[(2 × 50 × 15,000) ÷ (2 × 8%)] = 3,062 kilograms
Increase in EOQ = (Revised EOQ – Original EOQ) ÷ Original EOQ
= (3,062 – 2,500) ÷ 2,500 = 22.50% (approximately)
Rationale
 The EOQ will increase by exactly 50%.
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Part_2 - Exam Plan - Assessment Review
This answer is incorrect. The EOQ will increase by less than 50%, in case the annual demand for
the raw materials increases by 50%.
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Part_2 - Exam Plan - Assessment Review
Question 2
2.B.4.u
inv.m.tb.007_2205
LOS: 2.B.4.u
Lesson Reference: Inventory Management
Difficulty: medium
Bloom Code: 3
A retail store purchases soup cans from the manufacturer at a price of 80 cents per can. The annual
sales of soup cans are 17,520 units. The re-order quantity is 3,450 cans. The store holds a safety
inventory equal to 8 days’ sales.
The store is open 365 days a year and the lead time from placing an order for the soup cans with the
manufacturer to their receipt varies between 17 and 25 days.
What should the inventory reorder point be, at which an order should be placed?
Your Answer
1,008 cans
1,200 cans
Correct
1,392 cans
3,834 cans
Rationale
 1,008 cans
This answer is incorrect. The reorder point has been calculated without considering the safety
stock.
Rationale
 1,200 cans
This answer is incorrect. The reorder point has been incorrectly calculated by considering the
lead time to be 17 days.
Rationale
 1,392 cans
Correct.
Reorder point = (Average daily demand in units × Average lead time) + Safety stock
Daily demand (units) = Total annual requirement (units) ÷ Total number of days in a year =
17,520 units ÷ 365 days = 48 cans per day
Average lead time = 21 days
Safety stock = 8 days’ sales. Therefore, safety stock = 48 cans × 8 days = 384 cans
Reorder point = (48 cans × 21 days) + 384 cans = 1,392 cans
Rationale
 3,834 cans
This answer is incorrect. The reorder point has been incorrectly calculated by adding the
reorder quantity (3,450) and the safety stock (384).
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Part_2 - Exam Plan - Assessment Review
Question 3
2.B.4.y
inv.m.tb.005_2205
LOS: 2.B.4.y
Lesson Reference: Inventory Management
Difficulty: hard
Bloom Code: 5
Consider the following three situations a company could face:
A Decrease in demand
B Increase in cost to place an order
C Increase in carrying costs
Which of these situations by itself would cause the company’s Economic Order Quantity (EOQ) to
decrease?
Correct
A and C
A only
A, B, and C
B and C
Rationale
 A and C
Correct. Companies can use the Economic Order Quantity (EOQ) model to determine the order
size that minimizes the sum of ordering costs and carrying costs. The EOQ is a function of total
expected demand, the cost of placing an order, and inventory carrying costs per unit. As total
demand decreases, the optimal order size decreases since fewer items will need to be ordered
to meet the lower demand. When carrying costs increase, the optimal order size decreases since
it is more economical to keep fewer items on hand. However, when the cost to place an order
increases, the optimal order size increases since fewer orders should be placed with a higher
cost per order.
Rationale
 A only
This answer is incorrect. When carrying costs increase, it is more economical to place smaller
orders so that fewer items will be on hand.
Rationale
 A, B, and C
This answer is incorrect. When it costs more to place an order, it is more economical to place
fewer, larger orders.
Rationale
 B and C
This answer is incorrect. As total demand decreases, fewer items will need to be ordered to
meet the lower demand. In addition, it is more economical to place fewer, larger orders when it
costs more to place an order.
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Part_2 - Exam Plan - Assessment Review
Question 4
2.B.4.v
inv.m.tb.010_2205
LOS: 2.B.4.v
Lesson Reference: Inventory Management
Difficulty: medium
Bloom Code: 3
XYZ company has provided the following information relating to one of the raw material components
it uses:
Reorder size (units)
500
Level of buffer inventory (units)
100
Ordering costs per order
$50
Cost of storing one component unit per annum 20% of the purchase price
The company uses 20,000 units of the component annually and the cost of buying one unit from the
supplier amounts to $4.
What is the total annual inventory related cost (to the nearest whole $)?
$82,200
Correct
$82,280
Your Answer
$82,480
$82,400
Rationale
 $82,200
This answer is incorrect. The annual holding cost has been computed without considering the
buffer stock.
Annual holding cost: [(500 × 2)] ×[20% of $4] = $200
Total Annual Cost of Inventory has been incorrectly computed as,
$80,000 + $2,000 + $200 = $82,200
Rationale
 $82,280
Correct.
Total Annual Cost of Inventory = Annual purchase cost + Annual ordering cost + annual holding
cost
Annual purchase cost: 20,000 units × $4 = $80,000
Annual ordering cost: number of orders × cost per order
= (20,000 ÷ 500) × $50 = $2,000
Annual holding cost: Average inventory level × cost of storing one component unit per annum
= [(500 ÷ 2) +100] ×[20% of $4] = $280
Total Annual Cost of Inventory = $80,000 + $2,000 + $350 = $82,280
Rationale
 $82,480
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5/13
3/13/23, 10:07 PM
Part_2 - Exam Plan - Assessment Review
This answer is incorrect. The annual holding cost is incorrectly calculated by multiplying the
sum of reorder quantity and buffer inventory with the holding cost per unit.
Annual holding cost: [(500 + 100] ×[20% of $4] = $480
Total Annual Cost of Inventory has been incorrectly computed as,
$80,000 + $2,000 + $480 = $82,480
Rationale
 $82,400
This answer is incorrect. The annual holding cost is incorrectly calculated by multiplying the
reorder quantity with the holding cost per unit.
Annual holding cost: 500 × (20% of $4) = $400
Total Annual Cost of Inventory has been incorrectly computed as,
$80,000 + $2,000 + $400 = $82,400
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Part_2 - Exam Plan - Assessment Review
Question 5
2.B.4.v
inv.m.tb.002_2205
LOS: 2.B.4.v
Lesson Reference: Inventory Management
Difficulty: medium
Bloom Code: 4
The STA Company has the following inventory-related costs:
Purchasing department $50,000 Warehouse insurance
$35,000
Cost of inventory
purchases
$90,000
Lost revenue from missed sales due to lack of
$80,000
inventory
Inventory handling costs $52,000 Payment processing costs
$28,000
Based on this information, what is STA’s carrying costs?
Your Answer
$78,000
Correct
$87,000
$90,000
$115,000
Rationale
 $78,000
This answer is incorrect. STA’s ordering costs are $78,000.
Rationale
 $87,000
Correct. One category of inventory-related costs is carrying costs. These are costs incurred to
hold (or carry) inventory. As inventory levels increase, carrying costs increase. Examples include
warehouse costs, handling costs, and other costs incurred to store inventory. STA’s carrying
costs are the $35,000 in warehouse insurance and $52,000 in inventory handling costs. This
results in total carrying costs of $87,000.
Rationale
 $90,000
This answer is incorrect. STA’s stock-out costs are $90,000.
Rationale
 $115,000
This answer is incorrect. Payment processing costs are not considered a carrying cost.
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Part_2 - Exam Plan - Assessment Review
Question 6
2.B.4.x
inv.m.tb.004_2205
LOS: 2.B.4.x
Lesson Reference: Inventory Management
Difficulty: hard
Bloom Code: 5
Which of the following actions would most likely increase a company’s inventory turnover ratio and
its gross margin percentage?
Charging higher prices for goods
Charging lower prices for goods
Increasing product advertising
Correct
Improving production efficiency
Rationale
 Charging higher prices for goods
This answer is incorrect. Charging higher prices may increase gross margin percentage, but it is
likely to result in taking longer to sell goods as fewer buyers will be willing to pay higher prices.
Rationale
 Charging lower prices for goods
This answer is incorrect. Charging lower prices may increase inventory turnover (as lower selling
prices attract more buyers), but it is likely to result in a lower gross margin percentage as there
is no reduction in cost of goods sold to offset the lower selling prices.
Rationale
 Increasing product advertising
This answer is incorrect. Increasing product advertising may increase inventory turnover (as the
extra advertising attracts more buyers), but it will not impact gross margin percentage as selling
prices and cost of goods sold stay the same.
Rationale
 Improving production efficiency
Correct. Two common ratios used to evaluate inventory management are inventory turnover
and gross margin. Inventory turnover measures how often a company sells out its inventory,
with higher numbers indicating that it takes fewer days to sell inventory. Higher inventory
turnover is generally preferred as fewer days to sell inventory means the company will receive
cash faster, has a lower risk that its inventory will be damaged or become obsolete, and that the
company will have less inventory to keep track of. By improving production efficiency, goods
are moved more quickly and at lower costs through production, resulting in higher inventory
turnover. Gross margin measures how much sales revenue is left after subtracting cost of goods
sold. It can be stated in absolute dollars or as a percentage of sales revenue. By improving
production efficiency, cost of goods sold will decrease. The reduction in cost of goods sold will
increase the gross margin in absolute terms and as a percentage of sales revenue (even if sales
prices remain the same).
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Part_2 - Exam Plan - Assessment Review
Question 7
2.B.4.x
inv.m.tb.009_2205
LOS: 2.B.4.x
Lesson Reference: Inventory Management
Difficulty: medium
Bloom Code: 4
All of the following statements relating to inventory turnover ratio are correct, except:
A low inventory turnover ratio indicates an “over investment” in inventory.
Correct
A decreasing inventory turnover ratio indicates that a firm is holding its inventory for a shorter
period than earlier.
A high inventory turnover ratio can lead to a high gross profit margin.
Your Answer
Using the first in first out method of inventory valuation during a period of inflation may lead to an
understatement of the inventory turnover ratio.
Rationale
 A low inventory turnover ratio indicates an “over investment” in inventory.
This answer is incorrect. A low inventory turnover ratio indicates that the sales are weak and
inventory is excess, leading to over stocking.
Rationale
 A decreasing inventory turnover ratio indicates that a firm is holding its inventory for a
shorter period than earlier.
Correct. A decreasing inventory turnover ratio indicates that a firm is holding its inventory for a
longer period than earlier.
Rationale
 A high inventory turnover ratio can lead to a high gross profit margin.
This answer is incorrect. A high inventory turnover indicates that the overhead costs relating to
holding inventory is low, thus, improving the gross profit margin.
Rationale
 Using the first in first out method of inventory valuation during a period of inflation
may lead to an understatement of the inventory turnover ratio.
This answer is incorrect. During a period of inflation, if the first in first out method of inventory
valuation is used, the cost of goods sold would be a lower figure (as inventory valuation would
be based on earlier prices), thus, leading to an understatement of the inventory turnover ratio.
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Part_2 - Exam Plan - Assessment Review
Question 8
2.B.4.w
inv.m.tb.006_2205
LOS: 2.B.4.w
Lesson Reference: Inventory Management
Difficulty: hard
Bloom Code: 4
Which of the following statements about JIT are correct?
I. When product demand pattern cannot be forecasted accurately, it becomes difficult to
implement JIT.
II. A firm may lose bulk buying discounts on implementing JIT.
III. Implementing JIT can save a business from commodity shortages caused by supply chain
disruptions.
IV. Empowering workforce is a pre-requisite of JIT.
II, III, and IV
Your Answer
I, III, and IV
Correct
I, II, and IV
II and III
Rationale
 II, III, and IV
This answer is incorrect. Although Statements II and IV are correct, Statement III is not.
Statement III: JIT cannot protect a business from disruptions in the supply chain.
Rationale
 I, III, and IV
This answer is incorrect. Although Statements I and IV are correct, Statement III is not.
Statement III: JIT cannot protect a business from disruptions in the supply chain.
Rationale
 I, II, and IV
Correct.
Statement I: Since JIT is a “pull” strategy, demand prediction is of paramount importance. The
more accurate the demand prediction, the more successfully JIT can be implemented.
Statement II: JIT involves buying raw materials just when needed by the production
department, and not creating a huge inventory of raw materials. Firms which migrate to the JIT
system stand to lose bulk buying discounts as they would now buy in smaller lots.
Statement IV: JIT calls for quick decision making throughout an organization. Thus, employee
empowerment is an important pre – requisite of implementing JIT.
Rationale
 II and III
This answer is incorrect. Although Statement II is correct, Statement III is not. Apart from
Statement II, Statements I and IV are also correct.
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Part_2 - Exam Plan - Assessment Review
Question 9
2.B.4.u
inv.m.tb.001_2205
LOS: 2.B.4.u
Lesson Reference: Inventory Management
Difficulty: medium
Bloom Code: 3
Which of the following statements concerning safety stock is correct?
Correct
As variability in lead time decreases, the level of safety stock decreases.
As competition in an industry decreases, the level of safety stock increases.
As variability in daily sales increases, the level of safety stock decreases.
Your Answer
The optimal level of safety stock balances ordering costs and carrying costs.
Rationale
 As variability in lead time decreases, the level of safety stock decreases.
Correct. Companies hold safety stock to reduce stockout costs. The appropriate safety stock
level is based on the variability in demand, the variability in lead time, and the level of stockout
risk a company is willing to tolerate. As variability in lead time decreases, it becomes easier for
companies to manage inventory levels as they have a greater ability to predict when orders will
be received. Since companies hold safety stock to protect against running out of inventory,
companies with lower variability in lead times typically hold lower levels of safety stock.
Rationale
 As competition in an industry decreases, the level of safety stock increases.
This answer is incorrect. As competition in an industry decrease, customers have fewer
alternatives to obtain a product if a company does not have inventory to sell.
Rationale
 As variability in daily sales increases, the level of safety stock decreases.
This answer is incorrect. As variability in daily sales increases, it becomes more difficult for
companies to estimate inventory needs.
Rationale
 The optimal level of safety stock balances ordering costs and carrying costs.
This answer is incorrect. The economic order quantity model balances ordering costs and
carrying costs. Safety stock balances carrying costs and stock out costs.
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Part_2 - Exam Plan - Assessment Review
Question 10
2.B.4.w
inv.m.tb.003_2205
LOS: 2.B.4.w
Lesson Reference: Inventory Management
Difficulty: easy
Bloom Code: 3
Which of the following statements about just-in-time (JIT) inventory management is not correct?
To use just-in-time inventory successfully, companies need to have a reliable sales forecasting
system.
Companies implementing just-in-time inventory typically experience an increase in inventory
turnover.
Correct
Just-in-time inventory management is a “push” inventory system.
Companies using a just-in-time inventory management system tend to have fewer inventory writedowns than do other companies.
Rationale
 To use just-in-time inventory successfully, companies need to have a reliable sales
forecasting system.
This answer is incorrect. Since companies implementing just-in-time inventory carry little
inventory, they need to have more reliable sales forecasts.
Rationale
 Companies implementing just-in-time inventory typically experience an increase in
inventory turnover.
This answer is incorrect. Carrying less inventory results in an increase in inventory turnover even
if sales remain the same.
Rationale
 Just-in-time inventory management is a “push” inventory system.
Correct. In a just-in-time inventory management system, storing inventory is nonvalue adding
costs. Therefore, the goal is to reduce inventory as much as possible. Companies order
inventory “just in time” for it to be used in the production process. Just-in-time inventory is a
“pull” inventory system as inventory is “pulled” through the production system by a customer
order, not “pushed” through by the desire to build supply in anticipation of future sales.
Rationale
 Companies using a just-in-time inventory management system tend to have fewer
inventory write-downs than do other companies.
This answer is incorrect. Because inventory is kept to a minimum in a just-in-time inventory
management system, companies using just-in-time are less likely to need to write-down
inventory because of obsolescence.
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Part_2 - Exam Plan - Assessment Review
Question 11
2.C.1.i
tb.risk.u.006_1712
LOS: 2.C.1.i
Lesson Reference: Inventory Management
Difficulty: medium
Bloom Code: 3
The following information relates to Eagle Company's material A:
Annual usage in units
Working days per year
7,200
240
Normal lead time in working days
20
Maximum lead time in working days
45
Assuming that the units of material A will be required evenly throughout the year, the safety stock
and reorder point, respectively, would be:
Your Answer
600; 750.
750; 600.
600; 1,350.
Correct
750; 1,350.
Rationale
 600; 750.
This answer confused normal usage (30 units per day × 20 days) for safety stock and confused
reorder point for safety stock. Therefore, this is an incorrect answer.
Rationale
 750; 600.
This is the safety stock. However, this answer confused normal usage (30 units per day × 20
days) for reorder point. Therefore, this is an incorrect answer.
Rationale
 600; 1,350.
This answer confused normal usage (30 units per day × 20 days) for safety stock. However, this is
the reorder point. Therefore, this is an incorrect answer.
Rationale
 750; 1,350.
7,200 annual usage ÷ 240 days = 30 units per day.
Reorder point equals maximum usage during lead time.
30 units per day × 45 days = 1,350
Safety stock equals the difference between maximum and normal usage during lead time.
Therefore, this is the correct answer.
Maximum Usage ÷ Reorder Point (from text)
1,350
Less: Normal Usage: 30 units per day × 20 days 600
Safety Stock (1,350 − 750)
750
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