chap07.doc

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Department
Supply Chain Management
Course
33:799:301
Professor
spiegel
Semester
Fall

Description
Chapter 7—Inventory Management TRUE/FALSE 1. The four broad categories of inventories are raw materials, work-in-process, subassemblies, and finished goods. ANS: F PTS: 1 2. The ABC inventory control system categorizes inventory items into three groups, A, B, and C. A items are given highest priority, while C items have the lowest priority. Prioritization may be based on annual dollar usage, shelf life, or sales volume. ANS: T PTS: 1 3. The EOQ, also known as the economic order quantity, is the optimal order size in terms of cost because it minimizes the annual total inventory cost. The EOQ is the lot size where inventory holding costs equal annual ordering costs. ANS: T PTS: 1 4. The total annual inventory cost is the sum of the annual purchase cost, the annual holding cost, the annual capacity cost, and the annual ordering cost. ANS: F PTS: 1 5. Service parts sold to the repair shops are examples of dependent demand. ANS: F PTS: 1 6. Inventory turnover ratio shows how many times a firm turns over its inventory in an accounting period. Faster turnovers are generally viewed as negative because it indicates instability in the firm's inventory level. ANS: F PTS: 1 7. The ABC inventory matrix shows an ABC inventory classification based on annual usage on the vertical axis and an ABC inventory classification based on physical inventory on the horizontal axis. ANS: T PTS: 1 8. The ABC inventory matrix is used to monitor whether the firm is stocking the correct type of inventory and to detect obsolete stock. ANS: T PTS: 1 9. Radio Frequency Identification (RFID) is considered an eventual replacement of bar code because of its ability to store huge amount of information to differentiate specific unit of good. ANS: T PTS: 1 10. Electronic Product Code (EPC) is the only RFID standard adopted by the commercial sector and the U.S. Department of Defense. ANS: F PTS: 1 11. An RFID reader does not require direct line of sight to read the information stored in an RFID tag. ANS: T PTS: 1 12. Relaxing the constant price assumption of the classic EOQ model results in the Quantity Discount model. ANS: T PTS: 1 13. Relaxing the instantaneous replenishment assumption of the EOQ model results in the Economic Manufacturing Quantity model. ANS: T PTS: 1 14. The optimal order quantity for the quantity discount model may exist at a price breakpoint. ANS: T PTS: 1 15. In the Economic Manufacturing Quantity model, the annual consumption rate must be higher than the annual production rate. ANS: F PTS: 1 16. In the Economic Manufacturing Quantity model, average inventory is one-half of the economic manufacturing quantity. ANS: F PTS: 1 17. When demand and lead time are constant, reorder point is the demand during lead time. ANS: T PTS: 1 18. The continuous review inventory system is more expensive to monitor compared to the periodic review inventory system. ANS: T PTS: 1 19. The (s, S) continuous review inventory system orders the same quantity Q when physical inventory reaches the reorder points. ANS: F PTS: 1 20. The periodic inventory review system reviews physical inventory at specific points in time. ANS: T PTS: 1 21. Cycle counting counts the physical inventory to ensure that physical inventory matches against records. ANS: T PTS: 1 MULTIPLE CHOICE 1. Which of the following is NOT an assumption of the classic Economic Order Quantity (EOQ)? a. Lead time is known and constant. b. Demand is known and constant. c. Instantaneous replenishment. d. There is no quantity discount. e. The production rate must be greater than the consumption rate. ANS: E PTS: 1 2. If an item is ordered at its economic order quantity, the annual carrying cost should be: a. slightly less than the annual ordering cost. b. equal to the annual ordering cost. c. twice the annual purchase price. d. the square root of the annual ordering cost. e. cannot be determined because there is insufficient information provided. ANS: B PTS: 1 3. What inventory factor may be omitted from the basic EOQ derivation because it is a constant? a. Annual order-processing cost b. Annual purchase cost of goods c. Annual capital cost d. Annual setup costs e. all of these ANS: B PTS: 1 4. If usage is constant, as order size increases, annual order costs ____ but annual carrying costs ____. a. increase ..... increase b. decrease ..... decrease c. increase ..... decrease d. decrease ..... increase e. remain the same ..... increase ANS: D PTS: 1 5. Which one of the following statements regarding the economic order quantity is true? a. The EOQ model combines several different item orders to the same supplier. b. If an order quantity is larger than the EOQ, the annual holding cost exceeds the annual ordering cost. c. The EOQ model assumes a variable demand pattern. d. When the interest rate drops, both the holding cost and the EOQ decreases. e. EOQ is used to determine the optimum shipping quantity. ANS: B PTS: 1 6. The cost of a widget is $5, and the carrying rate is 40%; cost of processing an order is $25, annual demand is for 400 widgets, and supply and usage patterns are stable. What is the economic order quantity (EOQ)? a. 5 b. 20 c. 25 d. 100 e. 200 ANS: D PTS: 1 7. The cost of a widget is $5, and the carrying rate is 40%; the cost of processing an order is $25, the annual demand is 400 widgets, and supply and usage patterns are stable. Assuming you are ordering at the lot size of 200 units per order (not the EOQ quantity). What is the annual ordering cost? a. $10 b. $25 c. $50 d. $200 e. Cannot be determined based on the given information. ANS: C PTS: 1 8. Companies hold a supply of inventory for all of the following reasons EXCEPT: a. meet variation in product demand b. increase production change/setup costs c. allow production scheduling flexibility d. purchase in bulk to take advantage of quantity discounts e. maintain independence of operations (Decoupling) ANS: B PTS: 1 9. Which of the following cannot be considered as independent demand items? a. wholesale and retail merchandise items b. maintenance, repair, and operating supplies at a manufacturing company c. maintenance, repair, and operating supplies at a service firm d. raw material items that become part of the final product at a manufacturing firm e. service industry items such as hospital supplies or office supplies for law firms ANS: D PTS: 1 10. Which of the following is not an example of an ordering cost for products purchased from a supplier? a. the cost of transmitting the order b. the cost of receiving the product c. the cost associated with processing the invoice d. the opportunity cost of not ordering from a least cost supplier e. the cost of handling the product ANS: D PTS: 1 11. In the absence of demand and delivery lead time variation, if demand is eight per day and purchase lead time is four days, the reorder point is: a. 3. b. 8. c. 32. d. 35. e. 56. ANS: C PTS: 1 12. In the absence of demand and delivery lead time uncertainty, reorder point is the ____. a. demand during lead time b. safety stock c. sum of demand during lead time and safety stock d. economic order quantity e. average inventory ANS: A PTS: 1 13. In the presence of demand and delivery lead time uncertainty, reorder point is the ____. a. demand during lead time b. safety stock c. sum of demand during lead time and safety stock d. economic order quantity e. average inventory ANS: C PTS: 1 14. Which of the following is a disadvantage of excessive inventory? a. It hides production and other problems. b. It leads to higher inventory ordering cost. c. It leads to lower average inventory. d. It eliminates cycle stock. e. It reduces the need to conduct cycle count. ANS: A PTS: 1 15. The EOQ model with quantity discounts attempts to determine a. what is the lowest purchasing price. b. whether to use fixed-quantity or fixed period order policy. c. how many units should be ordered. d. what is the shortest lead time. e. what is the lowest amount of inventory necessary to satisfy a certain service level. ANS: C PTS: 1 16. ____, such as lubricants for machine, are used in the production process, but do not become parts of the final products. a. Raw materials b. Work-in-process c. Maintenance, repair and operating supplies d. Finished goods e. Cycle stock ANS: C PTS: 1 17. Which of the following is not an assumption of the economic order quantity model? a. Demand is known, constant, and independent. b. Lead time is known and constant. c. Quantity discounts are not possible. d. Production and use can occur simultaneously. e. The only variable costs are setup cost and holding (or carrying) cost. ANS: D PTS: 1 18. The primary purpose of the basic economic order quantity model is a. to calculate the reorder point, so that replenishments take place at the proper time b. to minimize the sum of carrying cost and holding cost c. to maximize the customer service level d. to minimize the sum of setup cost and holding cost e. to calculate the optimum safety stock ANS: D PTS: 1 19. Dependent demand and independent demand items differ in that I. for any product, all components are dependent-demand items II. the need for independent-demand items is forecast III. the need for dependent-demand items is calculated a. I only b. I & II only c. I & III only d. II & III only e. I, II & III ANS: E PTS: 1 20. If the actual order quantity is the economic order quantity in a problem that meets the assumptions of the model, the average amount of inventory on hand a. is zero b. is affected by the amount of product cost c. is one-half of the economic order quantity d. is smaller than the holding cost per unit e. cannot be determined from the given information ANS: C PTS: 1 21. In the quantity discount model, the optimum order quantity that minimizes annual total costs may exist at: I. the economic order quantity II. the economic manufacturing
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