INVENTORY MANAGEMENT

1. A bakery uses 80 bags of chocolate chips each year. The chocolate chips are purchased
from a supplier for a price of $80 per bag and an ordering cost of $20 per order. Bakery
A’s annual inventory holding cost percentage is 40%. The bakery order chocolate chip
bags 2 times every year. Assuming no variability in demand, what is their total annual
cost of ordering and holding inventory?
a. 800
b. 1360
c. 680
d. 320
2. As demand increases, the sum of total ordering and holding costs per period when using
the economic order quantity − − − − −− at a rate − − − − − − − the demand.
a. increases, slower than
b. decreases, slower than.
c. decreases, faster than.
d. increases, equal to.

Chicagoland Sweets (Questions 3 and 4) Chicagoland Sweets, a commercial baker, uses

flour at a constant rate of 4000 pounds every week. Their supplier sells flour in 50-pound
bags at a price of $20 per bag. Chicagoland’s management estimates that they incur a fixed
cost of $64 every time they place an order for flour. Their cost of capital is 25% per year
(Assume that 1 year = 50 weeks). Chicagoland determines its order size for flour to
minimize its annual inventory holding and ordering costs.

3. What is the optimal order number of 50-pound bags Chicagoland should order to
minimize annual cost of ordering and holding inventory (i.e., what is the economic
order quantity)?
a. 45
b. 320
c. 2262
d. 4000
4. Chicagoland would like to reduce the average amount of flour inventory it carries to
half without increasing its annual cost. Which of the following will achieve this
objective? (You can assume that the one-time cost of implementing these changes is
negligible).
a. Reduce the fixed cost of placing an order to 16.
b. Reduce the fixed cost of placing an order to 32.
c. Reduce the order size to half without changing anything else.
d. Reduce the order size to fourth without changing anything else.
5. Good-Enough-Buy sells laptops in its store, which it purchases from the major
computer manufacturer Orange Inc. Its weekly demand for laptops is normally
distributed with mean of 1000 and standard deviation of 200. Once Good-Enough-Buy
places an order, Orange Inc. takes 1.5 weeks to manufacture it and the trucking
company takes 1 week to deliver it. The senior management at Good-Enough-Buy has
mandated a cycle service level of 99% for the laptops (i.e., in each order cycle Good-
Enough-Buy should have enough inventory to not-stock out with probability 0.99).
What should be Good-Enough-Buy’s reorder point to make sure that it meets the 99%
service level requirement?
a. 2500
b. 3236
c. 3665
d. 5736
6. Good-Enough-Buy also sells Xanon cameras, which it purchases from camera
manufacturer Gony. The weekly demand for Xanon cameras is normally distributed
with mean 200 and standard deviation 50. Good-Enough-Buy follows a continuous
review system to manage its inventory and has set the reorder point to meet a fixed
service level of90% for the Xanon cameras. Recently Gony announced that due to
production glitches, its lead-time for delivering an order will increase from 1 week to 4
weeks. In order to keep its service level for Xanon camera at the same level, how
should Good-Enough-Buy adjust its safety inventory (safety stock)?
a. It should double the level of safety inventory
b. It should increase safety inventory four times.
c. It should keep safety inventory at the same level.
d. It should reduce safety inventory by half.
7. Evanston Wine Wholesalers (EWW) is a wine importer. It faces a high fixed cost
foreach shipment it brings into the country, so it carefully balances this fixed cost with
its holding costs when placing an order. An Australian winery has approached EWW
with an offer. It would like EWW to order more frequently. It has offered to pay half
of EWW’s fixed cost per order if EWW doubles its order frequency. EWW would have
to order eight times per year instead of four. Should EWW accept this offer?
a. Yes, because it will reduce EWW’s inventory holding costs.
b. Yes, because it will reduce EWW’s fixed costs.
c. No, because it will increase EWW’s inventory holding costs.
d. No, because it will increase EWW’s fixed costs.
8. Journey Plumbing (JP) sells two types of water heaters: a conventional heater with a
tank, and a tankless heater. Because demand for both types is steady with little variation,
JP holds little or no safety stock and makes its inventory decisions to minimize its
annual holding and ordering costs. The water heaters come from different suppliers but
have similar ordering costs. They also have the same demand rate, but the tankless
water heater costs JP more than the conventional one. Assuming the physical costs in
involved in holding inventory is negligible for either type of heater, which product has
higher annual inventory turns?
a. Conventional heaters.
b. Tankless heaters.
c. Both have equal inventory turns.
d. Can’t say based on given information.
9. Daily demand for ice creams at the I-Scream parlour is normally distributed with a
mean of 100 tubs and a standard deviation of 40 tubs. The ice cream is supplied by a
wholesaler who charges $2 per tub. The wholesaler charges a $90 delivery fee
independent of the order size. The opportunity cost of capital for I-Scream is estimated
to be 25% per year. Assume 360 days in the year. Currently, the owner places an order
for 2000 tubs of ice cream each time he has 1000 tubs on hand. If the delivery lead
time for ice creams is 5days, what is the average amount of time spent by a tub of ice
cream on the I-Scream parlour shelf?
a. Less than 1 day because ice cream melts.
b. 10 days.
c. 15 days
d. 5days
10. A petrol pump sells 1000 litres of petrol every day. Arranging for one tanker of petrol
delivery costs the petrol pump around INR 4000. The cost of capital for the pump owner
is around 12% per year. Assume the pump pays INR 60 per litre of petrol. What is the
optimal order quantity for the petrol pump? (Assume 360 days per year and that the
tanker is large enough.)
a. 1000 litres
b. 5000 litres
c. 10,000 litres
d. 20,000 litres
Cream Stone Ice Cream Parlor (Questions 11 and 12). Daily demand at the Cream-
Stone Ice Cream Parlor follows a Normal distribution with a mean of 100 tubs and a
standard deviation of 50 tubs. The ice cream is supplied by a wholesaler who charges $2
per tub and a $90 delivery fee independent of the order size. The opportunity cost of capital
for Cream-Stone is 25% per year. Currently, the owner places an order for 2000 tubs of
ice cream each time she has 600 tubs on hand. Assume 50 weeks in the year
11. If the delivery lead time is 4 days, what is Cream Stone's service level?
a. 50%
b. 84.13%
c. 97.72%
d. 99.3%
12. A predictive analytics vendor claims that it can reduce the standard deviation of daily
demand to 25 tubs. If Cream Stone wants to maintain the same service level and nothing
else about the business changes, what is the maximum amount it should be willing to
pay for this service per year?
a. $50
b. $250
c. $1250
d. $2500

Rent-a-Suit and ECHO (Questions 13 and 14). Rent-a-Suit (RAS) maintains an average
inventory of 7500 units, each of which has an average useful life of 25 weeks. They donate
all old suits to a non-profit, ECHO, which further distributes them among under privileged
youth seeking job opportunities in the formal sector. ECHO finds it optimal to pick the old
suits from RAS's premises 10 times per year on average. Assume that the cost of holding
one dress in ECHO's inventory is INR 300 per year. (Assume that 1 year = 50 weeks.)

13. What must be the fixed cost incurred per pick-up by ECHO?
a. INR 15,000
b. INR 20,000
c. INR 22,500
d. INR 25,000
14. RAS also incurs a holding cost of INR 500 per year on the old dresses. It proposes to
increase the shipment frequency to 20 times per year and share half of ECHO's fixed
cost per pick up. Which of the following is MOST LIKELY to happen if this new
arrangement was implemented?
a. RAS will reduce its cost, but ECHO would not.
b. ECHO would reduce its cost, but RAS would not.
c. Costs will reduce for both.
d. Costs will increase for both.