Exercises on Inventory Concepts
Chapter 12, MGMT4102, J. Wang
Name ________________________
1. Inventory is necessary for a business because
a. it plays a role of a buffer to provide better customer service.
b. it is a smart way to spend money.
c. it is like saving money in the bank..
2. A business does not want to have too much of inventory because
a. inventory isolates a work unit from the others.
b. the possibility of supply shortage is small.
c. it takes cash to have the inventory.
3. The EOQ model determines the best time to make an order.
a. True
b. False
4. The EOQ model determines the best order quantity per order.
a. True
b. False
5. Inventory level, which is measured by average inventory, is affected by number of units in an
order (order quantity).
a. True
b. False
6. How long the lead time is does not affect the optimal order quantity.
a. True
b. False
7. If annual demand is 9,000 units, ordering cost is $50 per order, holding cost is $10 per unit
per year, then the optimal order quantity Q* is
a. 250 units
b. 300 units
c. 400 units
8. If annual demand is 2,000 units, order setup cost is $50 per order, holding cost is $5 per unit
per month, then the optimal order quantity Q* is
a. 200 units
b. 57.7 units
c. 300 units
9. If there are 900 different inventoried items, then they must be dealt with individually when
the EOQ model is used to control the inventory.
a. True
b. False
10. If Q*=150 by the EOQ model, then we should order less than 150 units in an order to reduce
the total inventory cost.
a. True
b. False
11. The best order quantity will go _____ if the unit ordering cost goes up.
a. up
b. down
12. The best order quantity will go _____ if the unit holding cost per year goes up.
a. up
b. down
13. The total annual purchase cost (cost of goods) does not change with different order quantities,
as far as there is not volume discount.
a. True
b. False
14. If volume discount is offered by the supplier, the purchase cost (cost of goods) must be taken
into account when considering the best order quantity.
a. True
b. False
15. Extra units held in inventory to reduce the risk of stockout are called
a. ROP
b. safety stock
c. back order
d. JIT
16. If we set a higher safety stock, then the average inventory level would be higher.
a. True
b. False
17. If ordered items arrive in one batch, then the average inventory is __________.
a. Q + (safety stock).
b. Q/2 + (safety stock)
c. Q/2 + (safety stock)/2
18. If ordered items are delivered continuously as in EPQ model, then the average inventory is
___________ .
a. Q + (safety stock).
b. Q/2 + (safety stock)
c. Q/2 + (safety stock)/2
d. Imax + (safety stock)
e. Imax/2 + (safety stock)
f. Imax/2 + (safety stock)/2
19. In EPQ model, Imax is _________ order quantity Q.
a. equal to
b. lower than
c. higher than
20. The higher the order quantity is, the higher the re-order point (ROP) is.
a. True
b. False
21. If a manager is quite uncertain about the daily demand of an item, he tends to set a
_________ safety stock for that item.
a. small
b. large
22. For am item that is crucial for the sales of a store, the manager does not want to have
stockout on it. So, the manager tends to set a ________ safety stock for that item.
a. small
b. large
23. Joe paid totally $56 to purchase five CD’s online, in which each CD cost $10, and the
shipping and handling cost is $6. In this case, the ordering cost is __________.
a. $56
b. $5
c. $50
d. $6
e. $30
f. $11
24. Joe paid totally $56 to purchase five CD’s online, in which each CD cost $10, and the
shipping and handling cost is $6. In this case, the purchase cost (cost of goods) is __________.
a. $56
b. $5
c. $50
d. $6
e. $30
f. $11
25. Which of the follows is NOT ordering cost?
a. S/H cost
b. Rental for storage space
c. Labor cost to prepare orders
26. Which of the following is NOT inventory holding cost?
a. S/H cost
b. Rental for storage space
c. Insurance for inventoried items
d. Obsolescence of inventoried items
27. Setup cost refers to the cost and time involved in changing over a machine for preparing to
produce a different component.
a True
b. False
28. When the lot size changes, the ordering cost or setup cost ___________.
a. would change
b. would not change
29. According to the EPQ formula, Q will _________ if setup time is reduced.
a. get smaller
b. get larger
c. remain unchanged
30. If EPQ = Q = 200 units, then we say that the ___________ is 200 units.
a. order quantity
b. batch size
c. Both a and b.
31. Cost of goods (purchase cost) is not a factor in the EOQ formula.
a. True
b. False
32. If there is no volume discount, then the best order quantity is calculated directly from the
EOQ formula without needing to care about the total purchase cost.
a. True
b. False
33. If volume discounts are offered, then to derive the best order quantity, we must compare the
overall total costs, which include inventory and purchase costs, at the EOQ and at the discount
break points.
a. True
b. False
34. The formula for safety stock in a continuous review system is SS=zdl, where dl is
__________.
a. standard deviation of demand in units during the lead time
b. standard deviation of demand in units during the review period and lead time.
35. The formula for safety stock in a periodic review system is SS=zRP+L, where RP+L is
__________.
a. standard deviation of demand in units during the lead time
b. standard deviation of demand in units during the review period and lead time.
36. When using the formula for safety stock, SS=zdl or SS=zRP+L, the value of z is found in
__________.
a. Table 11-3, page 425.
b. Appendix B, page 671.
c. Both a and b.
37. ABC analysis is a method for ____________________.
a. determining the best order quantity.
b. determining the optimal inventory level.
c. classifying the inventoried items into A, B, C classes for efficient inventory
management.
38. Class C items in ABC analysis take ______ percent of total annual usage (in $) of inventory.
a. small
b. large
39. Class C items in ABC analysis take ______ percent of inventory in terms of number count (in
units) in inventory.
a. small
b. large
40. More management attention should be put on Class ___ items.
a. A
b. B
c. C
41. EOQ or EPQ model is used in the ______________.
a. continuous review inventory system
b. periodic review inventory systems
Answers: 1.a 2.c 3.b 4.a 5.a 6.a 7.b 8.b 9.a 10.b 11.a 12.b 13.a 14.a 15.b 16.a 17.b 18.e 19.b 20.b 21.b 22.b 23.d
24.c 25.b 26.a 27.a 28.b 29.a 30.c 31.a 32.a 33.a 34.a 35.b 36.b 37.c 38.a 39.b 40.a 41.a