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# 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. he !"# model determines the best time to make an order.
a. rue b. \$alse
%. he !"# model determines the best order &uantity per order.
a. rue b. \$alse
'. Inventory level( which is measured by average inventory( is affected by number of units in an
order )order &uantity*.
a. rue b. \$alse
+. ,ow long the lead time is does not affect the optimal order &uantity.
a. rue b. \$alse
-. If annual demand is .(/// units( ordering cost is 0'/ per order( holding cost is 01/ per unit
per year( then the optimal order &uantity #1 is
a. 2'/ units b. 3// units c. %// units
2. If annual demand is 2(/// units( order setup cost is 0'/ per order( holding cost is 0' per unit
per month( then the optimal order &uantity #1 is
a. 2// units b. '-.- units c. 3// units
.. If there are .// different inventoried items( then they must be dealt with individually when the
!"# model is used to control the inventory.
a. rue b. \$alse
1/. If #131'/ by the !"# model( then we should order less than 1'/ units in an order to reduce
the total inventory cost.
a. rue b. \$alse
11. he best order &uantity will go _____ if the unit ordering cost goes up.
a. up b. down
12. he best order &uantity will go _____ if the unit holding cost per year goes up.
a. up b. down
13. he total annual purchase cost )cost of goods* does not change with different order &uantities(
as far as there is not volume discount.
a. rue b. \$alse
1%. If volume discount is offered by the supplier( the purchase cost )cost of goods* must be taken
into account when considering the best order &uantity.
a. rue b. \$alse
1'. !4tra units held in inventory to reduce the risk of stockout are called
a. 5"6 b. safety stock c. back order d. 7I

1+. If we set a higher safety stock( then the average inventory level would be higher.
a. rue b. \$alse
1-. If ordered items arrive in one batch( then the average inventory is __________.
a. # 8 )safety stock*. b. #92 8 )safety stock*
c. #92 8 )safety stock*92
12. If ordered items are delivered continuously as in !6# model( then the average inventory is
___________ .
a. # 8 )safety stock*. b. #92 8 )safety stock*
c. #92 8 )safety stock*92 d. Ima4 8 )safety stock*
e. Ima492 8 )safety stock* f. Ima492 8 )safety stock*92
1.. In !6# model( Ima4 is _________ order &uantity #.
a. e&ual to b. lower than c. higher than
2/. he higher the order &uantity is( the higher the re:order point )5"6* is.
a. rue b. \$alse
21. If a manager is &uite uncertain about the daily demand of an item( he tends to set a _________
safety stock for that item.
a. small b. large
22. \$or am item that is crucial for the sales of a store( the manager does not want to have
stockout on it. ;o( the manager tends to set a ________ safety stock for that item.
a. small b. large

23. 7oe paid totally 0'+ to purchase five <=>s online( in which each <= cost 01/( and the
shipping and handling cost is 0+. In this case( the ordering cost is __________.
a. 0'+ b. 0' c. 0'/ d. 0+ e. 03/ f. 011
2%. 7oe paid totally 0'+ to purchase five <=>s online( in which each <= cost 01/( and the
shipping and handling cost is 0+. In this case( the purchase cost )cost of goods* is __________.
a. 0'+ b. 0' c. 0'/ d. 0+ e. 03/ f. 011
2'. ?hich of the follows is N" ordering cost@
a. ;9, cost b. 5ental for storage space
c. Aabor cost to prepare orders
2+. ?hich of the following is N" inventory holding cost@
a. ;9, cost b. 5ental for storage space
c. Insurance for inventoried items d. "bsolescence of inventoried items
2-. ;etup cost refers to the cost and time involved in changing over a machine for preparing to
produce a different component.
a rue b. \$alse
22. ?hen the lot siBe changes( the ordering cost or setup cost ___________.
a. would change b. would not change
2.. According to the !6# formula( # will _________ if setup time is reduced.
a. get smaller b. get larger c. remain unchanged
3/. If !6# 3 # 3 2// units( then we say that the ___________ is 2// units.
a. order &uantity b. batch siBe
c. Coth a and b.
31. <ost of goods )purchase cost* is not a factor in the !"# formula.
a. rue b. \$alse
32. If there is no volume discount( then the best order &uantity is calculated directly from the
!"# formula without needing to care about the total purchase cost.
a. rue b. \$alse
33. If volume discounts are offered( then to derive the best order &uantity( we must compare the
overall total costs( which include inventory and purchase costs( at the !"# and at the discount
break points.
a. rue b. \$alse

3%. he formula for safety stock in a continuous review system is ;;3Bdl( 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.
3'. he formula for safety stock in a periodic review system is ;;3B568A( where 568A 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.
3+. ?hen using the formula for safety stock( ;;3Bdl or ;;3B568A( the value of B is found in
__________.
a. able 11:3( page %2'.
b. Appendi4 C( page +-1.
c. Coth a and b.
3-. AC< analysis is a method for ____________________.
a. determining the best order &uantity.
b. determining the optimal inventory level.
c. classifying the inventoried items into A( C( < classes for efficient inventory management.
32. <lass < items in AC< analysis take ______ percent of total annual usage )in 0* of inventory.
a. small b. large
3.. <lass < items in AC< analysis take ______ percent of inventory in terms of number count )in
units* in inventory.
a. small b. large
%/. Dore management attention should be put on <lass ___ items.
a. A b. C c. <
%1. !"# or !6# model is used in the ______________.
a. continuous review inventory system
b. periodic review inventory systems
AnswersE 1.a 2.c 3.b %.a '.a +.a -.b 2.b ..a 1/.b 11.a 12.b 13.a 1%.a 1'.b 1+.a 1-.b 12.e 1..b 2/.b 21.b 22.b 23.d
2%.c 2'.b 2+.a 2-.a 22.b 2..a 3/.c 31.a 32.a 33.a 3%.a 3'.b 3+.b 3-.c 32.a 3..b %/.a %1.a