CH13

Chapter 13 Inventory Management
1. One important use of inventories in manufacturing is to decouple operations through the use of work in
process inventories.
True False
2. The objective of inventory management is to minimize the cost of holding inventory.
True False
3. A retail store that carries twice the inventory as its competitor will provide twice the customer service level.
True False
4. The overall objective of inventory management is to achieve satisfactory levels of customer service while
keeping inventory costs reasonable.
True False
5. The two main concerns of inventory control relate to the costs and the level of customer service.
True False
6. To provide satisfactory levels of customer service while keeping inventory costs within reasonable bounds,
two fundamental decisions must be made about inventory: the timing and size of orders.
True False
7. In the EOQ formula, holding costs under 10% are expressed as percentages, above 10% are expressed as
annual unit costs.
True False
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8. DVD recorders would be an example of independent demand items.
True False
9. Reorder point models are primarily used for dependent demand items.
True False
10. An example of inventory holding cost is the cost of moving goods to temporary storage after receipt from a
supplier.
True False
11. Decoupling operations applies to the railroad industry.
True False
12. Interest, insurance, and opportunity costs are all associated with holding costs.
True False
13. The ABC approach involves classifying inventory items by unit cost, with expensive items classified as
‘A' items and low cost items classified as ‘C' items.
True False
14. An inventory buffer adds value and lowers cost in all supply chains.
True False
15. In the ABC approach, C items typically represent about 15 percent of the number of items, but 60 percent
of the dollar usage.
True False
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16. EOQ inventory models are basically concerned with the timing of orders.
True False
17. The average inventory level is inversely related to order size.
True False
18. The average inventory level and the number of orders per year are inversely related: As one increases, the
other decreases.
True False
19. The EOQ should be regarded as an approximate quantity rather than an exact quantity. Thus, rounding the
calculated value is acceptable.
True False
20. Carrying cost is a function of order size; the larger the order, the higher the inventory carrying cost.
True False
21. Understocking an inventory item is a sure sign of inadequate inventory control.
True False
22. Annual ordering cost is inversely related to order size.
True False
23. The total cost curve is relatively flat near the EOQ.
True False
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24. Because price isn't a factor in the EOQ formula, quantity discounts won't affect EOQ calculations.
True False
25. In the quantity discount model, if holding costs are given as a percentage of unit price, a graph of the total
cost curves will have the same EOQ for each curve.
True False
26. In the quantity discount model, the optimum quantity will always be found on the lowest total cost curve.
True False
27. ROP models indicate to managers the time between orders.
True False
28. When to order can be calculated by the ROP and expressed as a quantity.
True False
29. The rate of demand is an important factor in determining the ROP.
True False
30. The inventory value of the supply chain exceeds the inventory value of the organization's work in process
inventory.
True False
31. Safety stock is held because we anticipate future demand.
True False
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32. Variability in demand and/or lead time can be compensated for by safety stock.
True False
33. Solving quality problems can lead to lower inventory levels.
True False
34. ROP models assume that demand during lead time is composed of a series of dependent daily demands.
True False
35. Profit margins tend to be inversely related to inventory turns.
True False
36. In the fixedorder interval model, the order size is the same for each order.
True False
37. The fixedorder interval model requires a continuous monitoring of inventory levels.
True False
38. Discrete stocking levels are used when an organization doesn't want visibility of inventory levels.
True False
39. The fixedorder interval model requires a larger amount of safety stock than the ROP model for the same
risk of a stockout.
True False
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40. The singleperiod model can be very helpful in determining when to order.
True False
41. The singleperiod model can be very helpful in determining how much to order.
True False
42. Monitoring inventory turns over time can be used as a measure of performance.
True False
43. A singleperiod model would be used mainly by organizations going out of business.
True False
44. The basic EOQ model ignores the purchasing cost.
True False
45. When the item is offered for resale, shortage costs in the singleperiod model can include a charge for loss
of customer goodwill.
True False
46. In the singleperiod model, the service level is the probability that demand will not exceed the stocking level
in any period.
True False
47. A quantity discount will lower the reorder point.
True False
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48. It is critical that the exact quantity calculated in the EOQ model be ordered.
True False
49. Safety stock eliminates all stock outs.
True False
50. The calculation of safety stock requires knowledge of demand and lead time variability.
True False
51. The two basic issues in inventory are how much to order and when to order.
True False
52. Cycle counting can be used in motorcycle inventory control.
True False
53. Using the EOQ model, the higher an item's carrying costs, the more frequently it will be ordered.
True False
54. The cycle time represents the time between reorder point and receipt of order.
True False
55. The cost of placing an order is a function of order size.
True False
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56. All stock outs must be avoided.
True False
57. In the basic EOQ model, annual holding cost is onehalf of the total annual cost for all items purchased.
True False
58. Quantity discounts are generally given for large number of orders.
True False
59. The larger the number of orders placed, the larger the average level of inventory.
True False
60. Which of the following is not one of the assumptions of the basic EOQ model?
A. Annual demand requirements are known and constant.
B. Lead time does not vary.
C. Each order is received in a single delivery.
D. Quantity discounts are available.
E. All of the above are necessary assumptions.
61. Which of the following interactions with vendors would potentially lead to inventory reductions?
A. reduce lead times
B. increase safety stock
C. less frequent purchases
D. larger batch quantities
E. longer order intervals
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62. A nonlinear cost related to order size is the cost of:
A. interest
B. insurance
C. taxes
D. receiving
E. space
63. In a twobin inventory system, the amount contained in the second bin is equal to the:
A. ROP
B. EOQ
C. amount in the first bin
D. optimum stocking level
E. safety stock
64. When carrying costs are stated as a percentage of unit price, the minimum points on the total cost curves:
A. Line up
B. Equal zero
C. Do not line up
D. Cannot be calculated
E. Depend on the percentage assigned
65. Dairy items, fresh fruit and newspapers are items that:
A. do not require safety stocks
B. cannot be ordered in large quantities
C. are subject to deterioration and spoilage
D. require that prices be lowered every two days
E. have minimal holding costs
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66. Which of the following is least likely to be included in order costs?
A. processing vendor invoices for payment
B. moving delivered goods to temporary storage
C. inspecting incoming goods for quantity
D. taking an inventory to determine how much is needed
E. temporary storage of delivered goods
67. In an ABC system, the typical percentage of the number of items in inventory for A items is about:
A. 10
B. 30
C. 50
D. 70
E. 90
68. In the ABC classification system, items which account for fifteen percent of the total dollarvolume for a
majority of the inventory items would be classified as:
A. A items
B. B items
C. C items
D. A items plus B items
E. B items plus C items
69. In the ABC classification system, items which account for sixty percent of the total dollarvolume for few
inventory items would be classified as:
A. A items
B. B items
C. C items
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70. The purpose of "cycle counting" is to:
A. count all the items in inventory
B. count bicycles and motorcycles in inventory
C. reduce discrepancies between inventory records and actual
D. reduce theft
E. count 10% of the items each month
71. The EOQ model is most relevant for which one of the following?
A. ordering items with dependent demand
B. determination of safety stock
C. ordering perishable items
D. determining fixed interval order quantities
E. determining fixed order quantities
72. Which is not a true assumption in the EOQ model?
A. Production rate is constant
B. Lead time doesn't vary
C. No more than 3 items are involved
D. Usage rate is constant
E. No quantity discounts
73. In a supermarket, a vendor's restocking the shelves every Monday morning is an example of:
A. safety stock replenishment
B. economic order quantities
C. reorder points
D. fixed order interval
E. blanket ordering
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74. A cycle count program will usually require that ‘A' items be counted:
A. daily.
B. once a week.
C. monthly.
D. quarterly.
E. more frequently than annually.
75. A risk avoider would want ______ safety stock.
A. Less
B. More
C. The same
D. Zero
E. 50%
76. In the basic EOQ model, if annual demand doubles, the effect on the EOQ is:
A. It doubles.
B. It is four times its previous amount.
C. It is half its previous amount.
D. It is about 70 percent of its previous amount.
E. It increases by about 40 percent.
77. In the basic EOQ model, if lead time increases from five to 10 days, the EOQ will:
A. double
B. increase, but not double
C. decrease by a factor of two
D. remain the same
E. none of the above
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78. In the basic EOQ model, an annual demand of 40 units, an ordering cost of $5, and a holding cost of $1 per
unit per year will result in an EOQ of:
A. 20
B. square root of 200
C. 200
D. 400
E. none of these
79. In the basic EOQ model, if D = 60 per month, S = $12, and H = $10 per unit per month, EOQ is:
A. 10
B. 12
C. 24
D. 72
E. 144
80. In the basic EOQ model, if annual demand is 50, carrying cost is $2, and ordering cost is $15, EOQ is
approximately:
A. 11
B. 20
C. 24
D. 28
E. 375
81. Which of the following is not true for Economic Production Quantity model?
A. Usage rate is constant.
B. Production rate exceeds usage rate.
C. Run size exceeds maximum inventory.
D. There are no ordering or setup costs.
E. Average inventory is onehalf maximum inventory.
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82. Given the same demand, setup/ordering costs, and carrying costs, the EOQ calculated using incremental
replenishment will be ____________ if instantaneous replenishment was assumed:
A. greater than the EOQ
B. equal to the EOQ
C. smaller than the EOQ
D. greater than or equal to the EOQ
E. smaller than or equal to the EOQ
83. The introduction of quantity discounts will cause the optimum order quantity to be:
A. smaller
B. unchanged
C. greater
D. smaller or unchanged
E. unchanged or greater
84. A fill rate is the percentage of _____ filled by stock on hand.
A. Shipments
B. Demand
C. Inventory
D. Safety stock
E. Lead time
85. In the quantity discount model, with carrying cost stated as a percentage of unit purchase price, in order for
the EOQ of the lowest curve to be optimum, it must:
A. have the lowest total cost
B. be in a feasible range
C. be to the left of the price break quantity for that price
D. have the largest quantity compared to other EOQ's
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86. Which one of the following is not generally a determinant of the reorder point?
A. rate of demand
B. length of lead time
C. lead time variability
D. stockout risk
E. purchase cost
87. If no variations in demand or lead time exist, the ROP will equal:
A. the EOQ
B. expected usage during lead time
C. safety stock
D. the service level
E. the EOQ plus safety stock
88. If average demand for an inventory item is 200 units per day, lead time is three days, and safety stock is 100
units, the reorder point is:
A. 100 units
B. 200 units
C. 300 units
D. 600 units
E. 700 units
89. Which one of the following is implied by a "lead time" service level of 95 percent?
A. Approximately 95 percent of demand during lead time will be satisfied.
B. Approximately 95 percent of inventory will be used during lead time.
C. The probability is 95 percent that demand during lead time will exactly equal the amount on hand at the
beginning of lead time.
D. The probability is 95 percent that demand during lead time will not exceed the amount on hand at the
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90. Which one of the following is implied by an "annual" service level of 95 percent?
B. The probability is 95 percent that demand will exceed supply during lead time.
C. The probability is 95 percent that demand will equal supply during lead time.
D. The probability is 95 percent that demand will not exceed supply during lead time.
E. None of the above.
91. Daily usage is exactly 60 gallons per day. Lead time is normally distributed with a mean of 10 days and a
standard deviation of 2 days. What is the standard deviation of demand during lead time?
A. 60 x 2
B. 60 times the square root of 2
C. 60 times the square root of 10
D. 60 x 10
92. Lead time is exactly 20 days long. Daily demand is normally distributed with a mean of 10 gallons per day
and a standard deviation of 2 gallons. What is the standard deviation of demand during lead time?
A. 20 x 2
B. 20 x 10
D. 2 times the square root of 10
93. All of the following are possible reasons for using the fixed order interval model except:
A. Supplier policy encourages use.
B. Grouping orders can save in shipping costs.
C. The required safety stock is lower than with an EOQ/ROP model.
D. It is suited to periodic checks of inventory levels rather than continuous monitoring.
E. Continuous monitoring is not practical.
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94. Which of these products would be most apt to involve the use of a singleperiod model?
A. gold coins
B. hammers
C. fresh fish
D. calculators
E. frozen corn
95. In a singleperiod model, if shortage and excess costs are equal, then the optimum service level is:
A. 0
B. .33
C. .50
D. .67
E. none of these
96. In a singleperiod model, if shortage cost is four times excess cost, then the optimum service level is ___
percent.
A. 100
B. 80
C. 60
D. 40
E. 20
97. In the singleperiod model, if excess cost is double shortage cost, the approximate stockout risk, assuming
an optimum service level, is ___ percent.
A. 100
B. 67
C. 50
D. 33
E. 5
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98. If, in a singleperiod inventory situation, the probabilities of demand being 1, 2, 3, or 4 units are .3, .3, .2,
and .2, respectively. If two units are stocked, what is the probability of selling both of them?
A. .5
B. .6
C. .7
D. .8
E. none of these
99. The management of supply chain inventories focuses on:
A. internal inventories
B. external inventories
C. both internal and external inventories
D. safety stock elimination
E. optimizing reorder points
100. An operations strategy for inventory management should work towards:
A. increasing lot sizes
B. decreasing lot sizes
C. increasing safety stocks
D. decreasing service levels
E. increasing order quantities
101. Cycle stock inventory is intended to deal with ________.
A. excess costs
B. shortage costs
C. stockouts
D. expected demand
E. quantity discounts
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102. An operations strategy which recognizes high carrying costs and reduces ordering costs will result in:
A. unchanged order quantities
B. slightly decreased order quantities
C. greatly decreased order quantities
D. slightly increased order quantities
E. greatly increased order quantities
103. The need for safety stocks can be reduced by an operations strategy which:
A. increases lead time
B. increases lead time variability
C. increases lot sizes
D. decreases ordering costs
E. decreases lead time variability
104. If average demand for an item is 20 units per day, safety stock is 50 units, and lead time is four days, the
ROP will be:
A. 20
B. 50
C. 70
D. 80
E. 130
105. With an ABC system, an item that had a high demand but a low annual dollar volume would probably be
classified as:
A. A
B. B
C. C
D. none of these
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106. The fixed order interval model would be most likely to be used for this situation:
A. A company has switched from mass production to lean production.
B. Production is done in batches.
C. Spare parts are ordered when a new machine is purchased.
D. Grouping orders can save shipping costs.
E. none of these
107. Which item would be least likely to be ordered under a fixed order interval system?
A. textbooks at a college bookstore
B. auto parts at an assembly plant
C. cards at a gift shop
D. canned peas at a supermarket
E. none of these
108. Which one of these would not be a factor in determining the reorder point?
A. the EOQ
B. the lead time
C. the variability of demand
D. the demand or usage rate
E. all are factors
109. A car rental agency uses 96 boxes of staples a year. The boxes cost $4 each. It costs $10 to order staples,
and carrying costs are $0.80 per box on an annual basis.
Determine:
(A) the order quantity that will minimize the sum of ordering and holding boxes of staples
(B) the annual cost of ordering and carrying the boxes of staples

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110. A service garage uses 120 boxes of cleaning cloths a year. The boxes cost $6 each. Ordering cost is $3 and
holding cost is 10 percent of purchase cost per unit on an annual basis.
Determine:
(A) The economic order quantity
(B) The total cost of carrying the cloths (excluding purchase price)
(C) The average inventory

111. A shop that makes candles offers a scented candle, which has a monthly demand of 360 boxes. Candles
can be produced at a rate of 36 boxes per day. The shop operates 20 days a month. Assume that demand is
uniform throughout the month. Setup cost is $60 for a run, and holding cost is $2 per box on a monthly basis.
Determine the following:
(A) the economic run size
(B) the maximum inventory
(C) the number of days in a run

112. Estimated demand for goldfilled lockets at Sam's Bargain Jewelry and Housewares is 2,420 lockets a year.
Manager Veronica Winters has indicated that ordering cost is $45, and that the following price schedule applies:
1 to 599 lockets, $.90 each; 600 to 1,199 lockets, $.80 each; and 1,200 or more, $.75 each. What order size will
minimize total cost if carrying cost is $.18 per locket on an annual basis?

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113. Suppose that you are the manager of a production department that uses 400 boxes of rivets per year. The
supplier quotes you a price of $8.50 per box for an order size of 199 boxes or less, a price of $8.00 per box for
orders of 200 to 999 boxes, and a price of $7.50 per box for an order of 1,000 or more boxes. You assign a
holding cost of 20 percent of the price to this inventory. What order quantity would you use if the objective is to
minimize total annual costs of holding, purchasing, and ordering? Assume ordering cost is $80/order.

114. The operator of a concession at a downtown location estimates that he will sell 400 bags of circus peanuts
during a month. Carrying costs are 17 percent of unit price and ordering cost is $22. The price schedule for bags
of peanuts is: 1 to 199, $1.00 each; 200 to 499, $.94 each; and 500 or more $.87 each. What order size would be
most economical?

115. A dry cleaning firm uses an average of 20 gallons of cleaning fluid a day. Usage tends to be normally
distributed with a standard deviation of two gallons per day. Lead time is four days, and the desired service
level is 92 percent. What amount of safety stock is appropriate if a fixed order size of 600 gallons is used?

22
116. Suppose that usage of cooking oil at Harry's Fish Fry is normally distributed with an average of 15
gallons/day and a standard deviation of two gallons/day. Harry has just fired the manager and taken over
operating the restaurant himself. Harry has asked you to help him decide how to reorder cooking oil in order to
achieve a service level which is seven times the risk of stockout (7/8). Lead time is eight days. Assume that
cooking oil can be ordered as needed.

117. A bakery's use of corn sweetener is normally distributed with a mean of 80 gallons per day and a standard
deviation of four gallons per day. Lead time for delivery of the corn sweetener is normal with a mean of six
days and a standard deviation of two days. If the manager wants a service level of 99 percent, what reorder
point should be used?

118. A manager reorders lubricant when the amount onhand reaches 422 pounds. Average daily usage is 45
pounds, which is normally distributed with a standard deviation of three pounds per day. Lead time is nine days.
What is the risk of a stockout?

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119. Given the following information:
Order quantity = 300; = 20 units; desired lead time service level = .86.
Find:
(A) the expected number of units short per cycle
(B) the annual service level

120. A company can produce a part it uses in an assembly operation at the rate of 50 an hour. The company
operates eight hours a day, 300 days a year. Daily usage of the part is 300 parts. The company uses the part
every day. The run size is 6,000 parts. The annual holding cost is $2 per unit, and setup cost is $100.
(A) How many runs per year will there be?
(B) While production is occurring, how many parts per day are being added to inventory?
(C) Assuming that production begins when there are no parts on hand, what is the maximum number of parts in
inventory?
(D) The machine is dedicated to this product. Every so often, preventive maintenance, which requires six
working days, must be performed on it. Does this interrupt production cycles, or is there enough time between
cycles to perform the maintenance? Explain.

121. The injection molding department of a company uses 40 pounds of a powder a day. Inventory is reordered
when the amount on hand is 240 pounds. Lead time averages five days. It is normally distributed and has a
standard deviation of two days. What is the probability of a stockout during lead time?

24
122. A shop owner uses a reorder point approach to restocking a certain raw material. Lead time is six days.
Usage of the material during lead time is normally distributed with a mean of 42 pounds and a standard
deviation of 4 pounds. When should the raw material be reordered if the acceptable risk of a stockout is 3%?

123. The manager of a bakery orders three 'caketogo' wedding cakes every Saturday to accommodate last
minute purchases. Demand for the cakes can be described by a Poisson distribution that has a mean of 2. The
cakes cost $10 each to prepare, and they sell for $26 each. Any cakes that haven't been sold by the end of the
day are sold for half price the next day. Usually, half of those are sold and the rest are tossed. What stocking
level would be appropriate?

124. A manager has just received a revised price schedule from a vendor. What order quantity should the
manager use in order to minimize total costs? Annual Demand is 120 units, ordering cost is $8, and annual
carrying cost is $1 per unit.

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A manufacturer is contemplating a switch from buying to producing a certain item. Setup cost would be the
same as ordering cost. The production rate would be about double the usage rate.
125. Compared to the EOQ, the economic production quantity would be approximately:
A. the same
B. 20 percent larger
C. 40 percent larger
D. 20 percent smaller
E. 40 percent smaller
126. Compared to the EOQ, the maximum inventory would be approximately:
A. 70 percent higher
B. 30 percent higher
C. the same
D. 30 percent lower
E. 70 percent lower
The manager of the Quick Stop Corner Convenience Store (which never closes) sells four cases of Stein beer
each day. Order costs are $8.00 per order, and Stein beer costs $.80 per sixpack (each case of Stein beer
contains four sixpacks). Orders arrive three days from the time they are placed. Daily holding costs are equal to
five percent of the cost of the beer.
127. At what point should he reorder Stein beer?
A. 0 cases remaining
B. 4 cases remaining
C. 12 cases remaining
D. 16 cases remaining
E. 20 cases remaining
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128. If he were to order 16 cases of Stein beer at a time, what would be the length of an order cycle?
A. 0.25 days
B. 3 days
C. 1 day
D. 4 days
E. 20 days
129. If he were to order 16 cases of Stein beer at a time, what would be the average inventory level?
A. 4 cases
B. 12 cases
C. 8 cases
D. 20 cases
E. 16 cases
130. If he were to order 16 cases of Stein beer at a time, what would be the daily total inventory costs,
EXCLUDING the cost of the beer?
A. $2.00
B. $4.00
C. $1.28
D. $3.28
E. $2.56
131. What is the economic order quantity for Stein beer?
A. 8 cases
B. 11 cases
C. 14 cases
D. 20 cases
E. 32 cases
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Ann Chovies, owner of the Perfect Pasta Pizza Parlor, uses 20 pounds of pepperoni each day in preparing
pizzas. Order costs for pepperoni are $10.00 per order, and carrying costs are 4 cents per pound per day. Lead
time for each order is 3 days, and the pepperoni itself costs $3.00 per pound.
132. At what point should she reorder pepperoni?
A. 20 pounds remaining
B. 40 pounds remaining
C. 60 pounds remaining
D. 80 pounds remaining
E. 100 pounds remaining
133. If she were to order 80 pounds of pepperoni at a time, what would be the length of an order cycle?
A. 0 days
B. 0.25 days
C. 3 days
D. 4 days
E. 5 days
134. If she were to order 80 pounds of pepperoni at a time, what would be the average inventory level?
A. 20 pounds
B. 40 pounds
C. 60 pounds
D. 80 pounds
E. 100 pounds
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135. If she were to order 80 pounds of pepperoni at a time, what would be the total daily costs, including the
cost of the pepperoni?
A. $60.00
B. $63.20
C. $64.00
D. $64.10
E. $65.00
136. What is the economic order quantity for pepperoni?
A. 20 pounds
B. 40 pounds
C. 60 pounds
D. 80 pounds
E. 100 pounds
The Operations Manager for Shadyside Savings & Loan orders cash from her home office for her very popular
"BIG BUCKS" automated teller machine, which only dispenses $100 bills. She estimates that this machine
dispenses an average of 12,500 bills per month, and that carrying a bill in inventory costs 10 percent of its value
annually. She knows that each order for these bills costs $300 for clerical and armored car delivery costs, and
that order lead time is six days.
137. Assuming a thirtyday month, at what point should bills be reordered?
A. 0 bills remaining
B. 417 bills remaining
C. 2,500 bills remaining
D. 10,000 bills remaining
E. 12,500 bills remaining
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138. Assuming a thirtyday month, if she were to order 6,000 bills at a time, what would be the length of an
order cycle?
A. 0.48 days
B. 2.08 days
C. 6 days
D. 8.4 days
E. 14.4 days
139. If she were to order 6,000 bills at a time, what would be the dollar value of the average inventory level?
A. $3,000
B. $6,000
C. $12,500
D. $300,000
E. $600,000
140. If she were to order 6,000 bills at a time, what would be the average monthly total costs, EXCLUDING the
value of the bills?
A. $625
B. $1,250
C. $2,500
D. $3,125
E. $37,500
141. What is the economic order quantity?
A. 600 bills
B. 3,000 bills
C. 949 bills
D. 6,215 bills
E. 12,500 bills
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Given the following data for a particular inventory item:

142. What is the economic order quantity for this item?

143. For the economic order quantity, what is the length of an order cycle?

144. For the economic order quantity, what is the reorder point?

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145. For the economic order quantity, what is the average inventory level?

146. For the economic order quantity, what are average weekly ordering costs?

147. For the economic order quantity, what are average weekly carrying costs?

148. For the economic order quantity, what are average weekly total costs, including the cost of the inventory
item?

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The materials manager for a billiard ball maker must periodically place orders for resin, one of the raw
materials used in producing billiard balls. She knows that manufacturing uses resin at a rate of 50 kilograms
each day, and that it costs $.04 per day to carry a kilogram of resin in inventory. She also knows that the order
costs for resin are $100 per order, and that the lead time for delivery is four (4) days.
149. At what point should resin be reordered?
A. 0 kilograms remaining
B. 50 kilograms remaining
C. 200 kilograms remaining
D. 400 kilograms remaining
E. 500 kilograms remaining
150. If order size was 1,000 kilograms of resin, what would be the length of an order cycle?
A. 0.05 days
B. 4 days
C. 16 days
D. 20 days
E. 50 days
151. If the order size was 1,000 kilograms of resin, what would be the average inventory level?
A. 50 kilograms
B. 200 kilograms
C. 500 kilograms
D. 800 kilograms
E. 1,000 kilograms
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152. If the order size was 1,000 kilograms of resin, what would be the daily total inventory costs, EXCLUDING
the cost of the resin?
A. $5
B. $10
C. $20
D. $25
E. $40
153. What is the economic order quantity for resin?
A. 50 kilograms
B. 100 kilograms
C. 250 kilograms
D. 500 kilograms
E. 1,000 kilograms
154. A firm stocks a seasonal item that it buys for $22/unit and sells for $29 unit. During the season, daily
demand can be described using a Poisson distribution with a mean of 2.4. Because of the nature of the item,
units remaining at the close of business each day must be removed at a cost of $2 each. What is the optimum
stocking level, and what is the effective service level?

155. Joe's Coffee Shoppe has fresh doughnuts delivered each morning. Daily demand for plain doughnuts is
approximately normal with a mean of 200 and a standard deviation of 15. Joe pays $1.20 per dozen and has a
standing order for 16 dozen. Joe and the staff eat any leftovers. What is the implied shortage cost?

34
156. A restaurant prepares Peking Duck daily at a cost of $18 per duck. Each duck generates revenue of $47 if
sold. Demand for Peking Duck can be described by a Poisson distribution with a mean of 4.2 ducks per day.
Unsold ducks at the end of each day are converted to duck soup at an additional cost of $5 over and above the
resulting value as soup. How many ducks should be prepared each day?

157. A machine is expected to use approximately three spare parts during its useful life. The spares cost $200
each and have no salvage value or other use. The manager has ordered five spares. Assuming a Poisson usage
rate, what range of shortage cost is implied?

158. A manager intends to order a new machine and must now decide on the number of spare parts to order
along with the machine. The parts cost $400 each and have no salvage value. The manager has compiled a
frequency distribution for the probable usage of spare parts, as shown. For what range of shortage costs would
stocking one spare part constitute an optimal decision?
Number of

35
The Corner Newsstand has demand for a certain weekly magazine that can be approximated by a Poisson
distribution with a mean of 9.0. Magazines are purchased for $1.50.
159. If unsold copies can be returned for half credit and the owner stocks ten copies, what is the implied range
of shortage cost?

160. If unsold copies must be destroyed and copies sell for $4.00 each, find the optimum stocking level.

161. If unsold copies can be returned for half credit and copies sell for $4.25 each, find the optimal stocking
level.

36
162. Demand for a component averages 80 units per week, with a weekly standard deviation of demand of 14
units. The current supplier of this component offers a fourweek lead time. Stockout risk is to be kept at 8%.
Assume that it costs $50 to hold one unit in inventory for a year. Suppose the annual cost for the items would be
$500 higher if they were purchased from another vendor, but that vendor would offer a twoweek lead time.
Would it be better to go with the moreexpensive but moreresponsive vendor?

37
13 Key

1. One important use of inventories in manufacturing is to decouple operations through the use of work in
process inventories.
TRUE
Decoupling operations is an important use of inventories.
AACSB: Reflective Thinking
Blooms: Remember
Difficulty: Medium
Learning Objective: 1301 Define the term inventory; list the major reasons for holding inventories; and list the main requirements for effective inventory management.
Stevenson Chapter 13 #1
Topic Area: The Nature and Importance of Inventories

2. The objective of inventory management is to minimize the cost of holding inventory.
FALSE
The objective of inventory management is to allow satisfactory customer service while keeping costs down.
Blooms: Remember
Difficulty: Easy
Learning Objective: 1304 Explain the objectives of inventory management.
Topic Area: Requirements for Effective Inventory Management

1
3. A retail store that carries twice the inventory as its competitor will provide twice the customer service level.
FALSE
There is a limit to how high service level can go; if the competitor's service level is 90%, the retailer can't
double that.
Blooms: Remember
Difficulty: Medium
Learning Objective: 1302 Discuss the nature and importance of service inventories.

4. The overall objective of inventory management is to achieve satisfactory levels of customer service while
keeping inventory costs reasonable.
TRUE
This is the overall objective of inventory management.
Blooms: Remember
Difficulty: Easy

5. The two main concerns of inventory control relate to the costs and the level of customer service.
TRUE
These are the essential facets of inventory control.
AACSB: Analytic
Blooms: Apply
Difficulty: Easy

2
6. To provide satisfactory levels of customer service while keeping inventory costs within reasonable bounds,
two fundamental decisions must be made about inventory: the timing and size of orders.
TRUE
These are the fundamental decisions regarding inventory control.
AACSB: Analytic
Blooms: Apply
Difficulty: Easy

7. In the EOQ formula, holding costs under 10% are expressed as percentages, above 10% are expressed as
annual unit costs.
FALSE
Holding costs are expressed in monetary terms, whether as a set value or as a percentage of the perunit cost.
Blooms: Remember
Difficulty: Medium
Learning Objective: 1306 Describe the basic EOQ model and its assumptions and solve typical problems.
Topic Area: How Much to Order: Economic Order Quantity Models

8. DVD recorders would be an example of independent demand items.
TRUE
Components of the DVD recorders would be dependent demand items.
Blooms: Remember
Difficulty: Easy
Topic Area: Introduction

3
9. Reorder point models are primarily used for dependent demand items.
FALSE
Reorder point models are primarily used for independent demand items.
Blooms: Remember
Difficulty: Medium
Learning Objective: 1309 Describe reorder point models and solve typical problems.
Topic Area: Reorder Point Ordering

10. An example of inventory holding cost is the cost of moving goods to temporary storage after receipt from a
supplier.
FALSE
These are ordering costs.
Blooms: Remember
Difficulty: Hard

11. Decoupling operations applies to the railroad industry.
FALSE
Decoupling refers to buffering operations in manufacturing.
Blooms: Remember
Difficulty: Easy

4
12. Interest, insurance, and opportunity costs are all associated with holding costs.
TRUE
These are holding costs.
Blooms: Remember
Difficulty: Easy

13. The ABC approach involves classifying inventory items by unit cost, with expensive items classified as
‘A' items and low cost items classified as ‘C' items.
FALSE
ABC approach classifies inventory according to some measure of importance.
Blooms: Remember
Difficulty: Medium
Learning Objective: 1305 Describe the ABC approach and explain how it is useful.

14. An inventory buffer adds value and lowers cost in all supply chains.
FALSE
Many buffers increase costs across supply chains.
Blooms: Remember
Difficulty: Medium

5
15. In the ABC approach, C items typically represent about 15 percent of the number of items, but 60 percent
of the dollar usage.
FALSE
C items typically represent about 60 percent of the number of items and about 15 percent of the dollar usage.
Blooms: Remember
Difficulty: Medium

16. EOQ inventory models are basically concerned with the timing of orders.
FALSE
EOQ models are concerned with the size of orders.
Blooms: Remember
Difficulty: Medium

17. The average inventory level is inversely related to order size.
FALSE
The average inventory level is positively related to order size.
Blooms: Remember
Difficulty: Medium

6
18. The average inventory level and the number of orders per year are inversely related: As one increases, the
other decreases.
TRUE
These are inversely related.
Blooms: Remember
Difficulty: Medium

19. The EOQ should be regarded as an approximate quantity rather than an exact quantity. Thus, rounding the
calculated value is acceptable.
TRUE
The total cost function is relatively flat, so rounding costs little.
Blooms: Remember
Difficulty: Medium

20. Carrying cost is a function of order size; the larger the order, the higher the inventory carrying cost.
TRUE
Larger order quantities lead to higher inventory carrying cost.
Blooms: Remember
Difficulty: Easy

7
21. Understocking an inventory item is a sure sign of inadequate inventory control.
FALSE
Having an occasional stockout is not necessarily a sign of inadequate inventory control.
Blooms: Understand
Difficulty: Hard

22. Annual ordering cost is inversely related to order size.
TRUE
Annual ordering cost decreases as order size increases.
Blooms: Remember
Difficulty: Easy

23. The total cost curve is relatively flat near the EOQ.
TRUE
Thus approximating the EOQ can be a very good solution.
Blooms: Remember
Difficulty: Easy

8
24. Because price isn't a factor in the EOQ formula, quantity discounts won't affect EOQ calculations.
FALSE
If quantity discounts are offered, the EOQ might vary based on different holding costs.
Blooms: Remember
Difficulty: Easy
Learning Objective: 1308 Describe the quantity discount model and solve typical problems.

25. In the quantity discount model, if holding costs are given as a percentage of unit price, a graph of the total
cost curves will have the same EOQ for each curve.
FALSE
Total cost curves will differ across the price levels.
Blooms: Remember
Difficulty: Hard

26. In the quantity discount model, the optimum quantity will always be found on the lowest total cost curve.
FALSE
The optimum quantity might actually be when the discount is passed up.
Blooms: Remember
Difficulty: Hard

9
27. ROP models indicate to managers the time between orders.
FALSE
ROP models indicate when, with regard to onhand inventory, orders should be placed.
Blooms: Remember
Difficulty: Hard

28. When to order can be calculated by the ROP and expressed as a quantity.
TRUE
ROP models indicate when, with regard to onhand inventory, orders should be placed.
Blooms: Remember
Difficulty: Easy

29. The rate of demand is an important factor in determining the ROP.
TRUE
The demand rate multiplied by the lead time is a major part of the ROP.
Blooms: Remember
Difficulty: Medium

10
30. The inventory value of the supply chain exceeds the inventory value of the organization's work in process
inventory.
TRUE
There can be raw materials and finished goods inventory at the organization. Other organizations in the supply
chain will have inventories, too.
Blooms: Remember
Difficulty: Medium

31. Safety stock is held because we anticipate future demand.
FALSE
Safety stock is held because we anticipate fluctuations in future demand or in lead time.
Blooms: Remember
Difficulty: Medium

32. Variability in demand and/or lead time can be compensated for by safety stock.
TRUE
Safety stock can be used to accommodate these.
Blooms: Remember
Difficulty: Medium

11
33. Solving quality problems can lead to lower inventory levels.
TRUE
Leaning out the organization can be facilitated by solving quality problems.
Blooms: Remember
Difficulty: Medium
Topic Area: Operations Strategy

34. ROP models assume that demand during lead time is composed of a series of dependent daily demands.
FALSE
ROP models assume that demand during lead time is composed of a series of independent daily demands.
Blooms: Remember
Difficulty: Hard

35. Profit margins tend to be inversely related to inventory turns.
TRUE
This is typically the case.
Blooms: Understand
Difficulty: Medium

12
36. In the fixedorder interval model, the order size is the same for each order.
FALSE
Order size varies from order to order in a fixedorder interval model.
Blooms: Remember
Difficulty: Medium
Learning Objective: 1303 Explain periodic and perpetual review systems.
Topic Area: How Much to Order: FixedOrderInterval Model

37. The fixedorder interval model requires a continuous monitoring of inventory levels.
FALSE
The fixedorder interval model leads to periodic monitoring of inventory levels.
Blooms: Remember
Difficulty: Medium

38. Discrete stocking levels are used when an organization doesn't want visibility of inventory levels.
FALSE
Discrete stocking refers to having to stock a discrete number of units.
Blooms: Remember
Difficulty: Medium
Learning Objective: 1310 Describe situations in which the single period model would be appropriate; and solve typical problems.
Topic Area: The SinglePeriod Model

13
39. The fixedorder interval model requires a larger amount of safety stock than the ROP model for the same
risk of a stockout.
TRUE
Fixedorder intervals typically carry more safety stock.
Blooms: Remember
Difficulty: Hard

40. The singleperiod model can be very helpful in determining when to order.
FALSE
The singleperiod model helps determine how many to order.
Blooms: Remember
Difficulty: Medium

41. The singleperiod model can be very helpful in determining how much to order.
TRUE
The singleperiod model helps determine how many to order.
Blooms: Remember
Difficulty: Medium

14
42. Monitoring inventory turns over time can be used as a measure of performance.
TRUE
Greater turnover often implies better performance.
Blooms: Remember
Difficulty: Medium

43. A singleperiod model would be used mainly by organizations going out of business.
FALSE
The singleperiod model applies to many regularly occurring circumstances.
Blooms: Remember
Difficulty: Medium

44. The basic EOQ model ignores the purchasing cost.
TRUE
Only if quantity discounts are offered does purchasing cost enter into EOQ analysis.
Blooms: Remember
Difficulty: Medium

15
45. When the item is offered for resale, shortage costs in the singleperiod model can include a charge for loss
of customer goodwill.
TRUE
Greater loss of goodwill would equate with a higher shortage cost.
Blooms: Remember
Difficulty: Medium

46. In the singleperiod model, the service level is the probability that demand will not exceed the stocking level
in any period.
TRUE
If demand exceeds the stocking level, a stockout as occurred.
Blooms: Remember
Difficulty: Easy

47. A quantity discount will lower the reorder point.
FALSE
The reorder point is independent of quantity discounts.
Blooms: Remember
Difficulty: Hard

16
48. It is critical that the exact quantity calculated in the EOQ model be ordered.
FALSE
Because the total cost curve is flat, modest rounding of the EOQ is permissible.
Blooms: Remember
Difficulty: Medium

49. Safety stock eliminates all stock outs.
FALSE
Safety stock only ensures that a given likelihood of stock outs.
Blooms: Remember
Difficulty: Medium

50. The calculation of safety stock requires knowledge of demand and lead time variability.
TRUE
Both of these play a role in the calculation of safety stock.
Blooms: Remember
Difficulty: Easy

17
51. The two basic issues in inventory are how much to order and when to order.
TRUE
Quantity and timing are the two basic issues in inventory management.
Blooms: Remember
Difficulty: Medium

52. Cycle counting can be used in motorcycle inventory control.
TRUE
Cycle counting can also be used in automobile inventory control.
Blooms: Remember
Difficulty: Medium

53. Using the EOQ model, the higher an item's carrying costs, the more frequently it will be ordered.
TRUE
As carrying costs increase, the optimal order quantity decreases.
Blooms: Remember
Difficulty: Hard

18
54. The cycle time represents the time between reorder point and receipt of order.
FALSE
The cycle time represents the time between orders.
Blooms: Remember
Difficulty: Medium

55. The cost of placing an order is a function of order size.
FALSE
The cost of placing an order is typically unrelated to order size.
Blooms: Remember
Difficulty: Medium

56. All stock outs must be avoided.
FALSE
Most of the time it would be too costly to avoid all stockouts.
Blooms: Remember
Difficulty: Hard

19
57. In the basic EOQ model, annual holding cost is onehalf of the total annual cost for all items purchased.
FALSE
Annual holding cost equals half the product of the order quantity and the perunitperyear holding cost.
Blooms: Remember
Difficulty: Medium

58. Quantity discounts are generally given for large number of orders.
FALSE
Quantity discounts are given for smaller, but larger, orders.
Blooms: Remember
Difficulty: Easy

59. The larger the number of orders placed, the larger the average level of inventory.
FALSE
More orders means smaller quantities, which means lower average inventory.
Blooms: Remember
Difficulty: Medium

20
60. Which of the following is not one of the assumptions of the basic EOQ model?
A. Annual demand requirements are known and constant.
B. Lead time does not vary.
C. Each order is received in a single delivery.
D. Quantity discounts are available.
E. All of the above are necessary assumptions.
In the basic EOQ model quantity discounts are not available.
Blooms: Remember
Difficulty: Medium

61. Which of the following interactions with vendors would potentially lead to inventory reductions?
A. reduce lead times
B. increase safety stock
C. less frequent purchases
D. larger batch quantities
E. longer order intervals
Reducing lead times would have the effect of reducing safety stock requirements and therefore reducing
inventories.
Blooms: Understand
Difficulty: Hard

21
62. A nonlinear cost related to order size is the cost of:
A. interest
B. insurance
C. taxes
D. receiving
E. space
Receiving cost is a nonlinear cost associated with order size.
Blooms: Understand
Difficulty: Hard

63. In a twobin inventory system, the amount contained in the second bin is equal to the:
A. ROP
B. EOQ
C. amount in the first bin
D. optimum stocking level
E. safety stock
The second bin equals the amount needed during lead time in addition to any safety stock.
Blooms: Remember
Difficulty: Medium

22
64. When carrying costs are stated as a percentage of unit price, the minimum points on the total cost curves:
A. Line up
B. Equal zero
C. Do not line up
D. Cannot be calculated
E. Depend on the percentage assigned
Curves aren't symmetrical if holding cost differs across price breaks.
Blooms: Understand
Difficulty: Hard

65. Dairy items, fresh fruit and newspapers are items that:
A. do not require safety stocks
B. cannot be ordered in large quantities
C. are subject to deterioration and spoilage
D. require that prices be lowered every two days
E. have minimal holding costs
Deterioration and spoilage increase holding costs.
Blooms: Remember
Difficulty: Medium

23
66. Which of the following is least likely to be included in order costs?
A. processing vendor invoices for payment
B. moving delivered goods to temporary storage
C. inspecting incoming goods for quantity
D. taking an inventory to determine how much is needed
E. temporary storage of delivered goods
Storage costs are holding costs.
Blooms: Remember
Difficulty: Hard

67. In an ABC system, the typical percentage of the number of items in inventory for A items is about:
A. 10
B. 30
C. 50
D. 70
E. 90
Class A items represent a relatively small portion of items.
Blooms: Remember
Difficulty: Easy

24
68. In the ABC classification system, items which account for fifteen percent of the total dollarvolume for a
majority of the inventory items would be classified as:
A. A items
B. B items
C. C items
These would be class C items.
Blooms: Remember
Difficulty: Easy

69. In the ABC classification system, items which account for sixty percent of the total dollarvolume for few
inventory items would be classified as:
A. A items
B. B items
C. C items
These would be class A items.
Blooms: Remember
Difficulty: Easy

25
70. The purpose of "cycle counting" is to:
A. count all the items in inventory
B. count bicycles and motorcycles in inventory
C. reduce discrepancies between inventory records and actual
D. reduce theft
E. count 10% of the items each month
Cycle counting is intended to improve inventory record accuracy.
Blooms: Remember
Difficulty: Easy

71. The EOQ model is most relevant for which one of the following?
A. ordering items with dependent demand
B. determination of safety stock
C. ordering perishable items
D. determining fixed interval order quantities
E. determining fixed order quantities
The EOQ is a fixedquantity approach.
Blooms: Understand
Difficulty: Medium

26
72. Which is not a true assumption in the EOQ model?
A. Production rate is constant
B. Lead time doesn't vary
C. No more than 3 items are involved
D. Usage rate is constant
E. No quantity discounts
EOQ can be used across multiple items.
Blooms: Remember
Difficulty: Hard

73. In a supermarket, a vendor's restocking the shelves every Monday morning is an example of:
A. safety stock replenishment
B. economic order quantities
C. reorder points
D. fixed order interval
E. blanket ordering
This would be a weekly interval model.
Blooms: Remember
Difficulty: Medium

27
74. A cycle count program will usually require that ‘A' items be counted:
A. daily.
B. once a week.
C. monthly.
D. quarterly.
E. more frequently than annually.
Class A items are counted more frequently.
Blooms: Remember
Difficulty: Hard

75. A risk avoider would want ______ safety stock.
A. Less
B. More
C. The same
D. Zero
E. 50%
Greater risk aversion is associated with more safety stock.
Blooms: Understand
Difficulty: Easy

28
76. In the basic EOQ model, if annual demand doubles, the effect on the EOQ is:
A. It doubles.
B. It is four times its previous amount.
C. It is half its previous amount.
D. It is about 70 percent of its previous amount.
E. It increases by about 40 percent.
The EOQ does not increase linearly with demand.
Blooms: Understand
Difficulty: Hard

77. In the basic EOQ model, if lead time increases from five to 10 days, the EOQ will:
A. double
B. increase, but not double
C. decrease by a factor of two
D. remain the same
The EOQ is independent of lead time.
Blooms: Remember
Difficulty: Medium

29
78. In the basic EOQ model, an annual demand of 40 units, an ordering cost of $5, and a holding cost of $1 per
unit per year will result in an EOQ of:
A. 20
B. square root of 200
C. 200
D. 400
E. none of these
Use the base EOQ formula.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

79. In the basic EOQ model, if D = 60 per month, S = $12, and H = $10 per unit per month, EOQ is:
A. 10
B. 12
C. 24
D. 72
E. 144
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

30
80. In the basic EOQ model, if annual demand is 50, carrying cost is $2, and ordering cost is $15, EOQ is
approximately:
A. 11
B. 20
C. 24
D. 28
E. 375
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

81. Which of the following is not true for Economic Production Quantity model?
A. Usage rate is constant.
B. Production rate exceeds usage rate.
C. Run size exceeds maximum inventory.
D. There are no ordering or setup costs.
E. Average inventory is onehalf maximum inventory.
There are ordering or setup costs in the EPQ model.
Blooms: Remember
Difficulty: Medium
Learning Objective: 1307 Describe the economic production quantity model and solve typical problems.

31
82. Given the same demand, setup/ordering costs, and carrying costs, the EOQ calculated using incremental
replenishment will be ____________ if instantaneous replenishment was assumed:
A. greater than the EOQ
B. equal to the EOQ
C. smaller than the EOQ
D. greater than or equal to the EOQ
E. smaller than or equal to the EOQ
The EPQ will be smaller than the EOQ.
Blooms: Understand
Difficulty: Medium

83. The introduction of quantity discounts will cause the optimum order quantity to be:
A. smaller
B. unchanged
C. greater
D. smaller or unchanged
E. unchanged or greater
Quantity discounts cannot make the optimum quantity be smaller.
Blooms: Understand
Difficulty: Hard

32
84. A fill rate is the percentage of _____ filled by stock on hand.
A. Shipments
B. Demand
C. Inventory
D. Safety stock
E. Lead time
The fill rate is the percentage of demand filled directly from onhand inventory.
Blooms: Remember
Difficulty: Medium

85. In the quantity discount model, with carrying cost stated as a percentage of unit purchase price, in order for
the EOQ of the lowest curve to be optimum, it must:
A. have the lowest total cost
B. be in a feasible range
C. be to the left of the price break quantity for that price
D. have the largest quantity compared to other EOQ's
If not feasible, that quantity will have to be adjusted upward and then total cost calculated.
Blooms: Understand
Difficulty: Hard

33
86. Which one of the following is not generally a determinant of the reorder point?
A. rate of demand
B. length of lead time
C. lead time variability
D. stockout risk
E. purchase cost
Purchase cost does not enter into reorder point calculations.
Blooms: Remember
Difficulty: Medium

87. If no variations in demand or lead time exist, the ROP will equal:
A. the EOQ
B. expected usage during lead time
C. safety stock
D. the service level
E. the EOQ plus safety stock
The ROP will be the demand rate times the lead time.
Blooms: Remember
Difficulty: Easy

34
88. If average demand for an inventory item is 200 units per day, lead time is three days, and safety stock is 100
units, the reorder point is:
A. 100 units
B. 200 units
C. 300 units
D. 600 units
E. 700 units
The ROP will be the safety stock added to the product of the demand rate and the lead time.
AACSB: Analytic
Blooms: Apply
Difficulty: Easy

89. Which one of the following is implied by a "lead time" service level of 95 percent?
B. Approximately 95 percent of inventory will be used during lead time.
C. The probability is 95 percent that demand during lead time will exactly equal the amount on hand at the
D. The probability is 95 percent that demand during lead time will not exceed the amount on hand at the
A stock only occurs if demand during lead time exceeds the ROP.
Blooms: Understand
Difficulty: Hard

35
90. Which one of the following is implied by an "annual" service level of 95 percent?
B. The probability is 95 percent that demand will exceed supply during lead time.
C. The probability is 95 percent that demand will equal supply during lead time.
D. The probability is 95 percent that demand will not exceed supply during lead time.
E. None of the above.
The annual service level is usually greater than the cycle service level, and thus the risk of a stockout during
lead time is much smaller than 5 percent.
Blooms: Understand
Difficulty: Hard

91. Daily usage is exactly 60 gallons per day. Lead time is normally distributed with a mean of 10 days and a
standard deviation of 2 days. What is the standard deviation of demand during lead time?
A. 60 x 2
B. 60 times the square root of 2
D. 60 x 10
The standard deviation of demand during lead time is the square root of squared demand times the squared
standard deviation of lead time.
AACSB: Analytic
Blooms: Apply
Difficulty: Hard

36
92. Lead time is exactly 20 days long. Daily demand is normally distributed with a mean of 10 gallons per day
and a standard deviation of 2 gallons. What is the standard deviation of demand during lead time?
A. 20 x 2
B. 20 x 10
D. 2 times the square root of 10
The standard deviation of demand during lead time equals the daily standard deviation of demand times the
square root of the lead time.
AACSB: Analytic
Blooms: Apply
Difficulty: Hard

93. All of the following are possible reasons for using the fixed order interval model except:
A. Supplier policy encourages use.
B. Grouping orders can save in shipping costs.
C. The required safety stock is lower than with an EOQ/ROP model.
D. It is suited to periodic checks of inventory levels rather than continuous monitoring.
E. Continuous monitoring is not practical.
Safety stock is higher in a fixed order interval model.
Blooms: Understand
Difficulty: Medium

37
94. Which of these products would be most apt to involve the use of a singleperiod model?
A. gold coins
B. hammers
C. fresh fish
D. calculators
E. frozen corn
The perishability of fresh fish makes it more appropriate for a singleperiod model.
Blooms: Understand
Difficulty: Easy
Learning Objective: 1310 Describe situations in which the singleperiod model would be appropriate; and solve typical problems.

95. In a singleperiod model, if shortage and excess costs are equal, then the optimum service level is:
A. 0
B. .33
C. .50
D. .67
E. none of these
The ratio of shortage cost to shortage plus excess cost is 0.5.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

38
96. In a singleperiod model, if shortage cost is four times excess cost, then the optimum service level is ___
percent.
A. 100
B. 80
C. 60
D. 40
E. 20
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

97. In the singleperiod model, if excess cost is double shortage cost, the approximate stockout risk, assuming
an optimum service level, is ___ percent.
A. 100
B. 67
C. 50
D. 33
E. 5
AACSB: Analytic
Blooms: Apply
Difficulty: Hard

39
98. If, in a singleperiod inventory situation, the probabilities of demand being 1, 2, 3, or 4 units are .3, .3, .2,
and .2, respectively. If two units are stocked, what is the probability of selling both of them?
A. .5
B. .6
C. .7
D. .8
E. none of these
Both units will be sold if demand is for 2, 3 or 4 units.
AACSB: Analytic
Blooms: Apply
Difficulty: Hard

99. The management of supply chain inventories focuses on:
A. internal inventories
B. external inventories
C. both internal and external inventories
D. safety stock elimination
E. optimizing reorder points
Supply chain inventory involves both internal and external inventories.
Blooms: Remember
Difficulty: Medium

40
100. An operations strategy for inventory management should work towards:
A. increasing lot sizes
B. decreasing lot sizes
C. increasing safety stocks
D. decreasing service levels
E. increasing order quantities
If lot sizes can be reduced, operations become leaner.
Blooms: Remember
Difficulty: Easy

101. Cycle stock inventory is intended to deal with ________.
A. excess costs
B. shortage costs
C. stockouts
D. expected demand
E. quantity discounts
Cycle stock is intended to deal with expected demand, while safety stock is intended to reduce stockouts
resulting from demand uncertainty.
Blooms: Remember
Difficulty: Medium
Topic Area: Inventory Ordering Policies

41
102. An operations strategy which recognizes high carrying costs and reduces ordering costs will result in:
A. unchanged order quantities
B. slightly decreased order quantities
C. greatly decreased order quantities
D. slightly increased order quantities
E. greatly increased order quantities
Processes will be leaned leading to smaller order quantities.
Blooms: Remember
Difficulty: Medium

103. The need for safety stocks can be reduced by an operations strategy which:
A. increases lead time
B. increases lead time variability
C. increases lot sizes
D. decreases ordering costs
E. decreases lead time variability
Reduced lead time variability will reduce the size of safety stocks.
Blooms: Understand
Difficulty: Medium

42
104. If average demand for an item is 20 units per day, safety stock is 50 units, and lead time is four days, the
ROP will be:
A. 20
B. 50
C. 70
D. 80
E. 130
Multiply the demand rate by the lead time and add the safety stock.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

105. With an ABC system, an item that had a high demand but a low annual dollar volume would probably be
classified as:
A. A
B. B
C. C
D. none of these
Low dollar volume items tend to be classified as C items.
Blooms: Remember
Difficulty: Medium

43
106. The fixed order interval model would be most likely to be used for this situation:
A. A company has switched from mass production to lean production.
B. Production is done in batches.
C. Spare parts are ordered when a new machine is purchased.
D. Grouping orders can save shipping costs.
E. none of these
If ordering costs can be saved by grouping orders, the fixed order interval model is especially attractive.
Blooms: Understand
Difficulty: Hard

107. Which item would be least likely to be ordered under a fixed order interval system?
A. textbooks at a college bookstore
B. auto parts at an assembly plant
C. cards at a gift shop
D. canned peas at a supermarket
E. none of these
Auto parts at an assembly plant would be unlikely candidates for a fixed order interval system.
Blooms: Understand
Difficulty: Medium

44
108. Which one of these would not be a factor in determining the reorder point?
A. the EOQ
B. the lead time
C. the variability of demand
D. the demand or usage rate
E. all are factors
The ROP is independent of the EOQ.
Blooms: Understand
Difficulty: Hard

109. A car rental agency uses 96 boxes of staples a year. The boxes cost $4 each. It costs $10 to order staples,
and carrying costs are $0.80 per box on an annual basis.
Determine:
(A) the order quantity that will minimize the sum of ordering and holding boxes of staples
(B) the annual cost of ordering and carrying the boxes of staples
D = 96 boxes/year
S = $10
H = $.80 per boxyear

Feedback: Use the EOQ and the total annual cost formula.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

45
110. A service garage uses 120 boxes of cleaning cloths a year. The boxes cost $6 each. Ordering cost is $3 and
holding cost is 10 percent of purchase cost per unit on an annual basis.
Determine:
(A) The economic order quantity
(B) The total cost of carrying the cloths (excluding purchase price)
(C) The average inventory
D = 120 boxes per year
S = $3
H = .10($6) = $.60 per boxyear
A)
B)
C)
Feedback: Use the EOQ, total annual cost and average inventory formulas.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

46
111. A shop that makes candles offers a scented candle, which has a monthly demand of 360 boxes. Candles
can be produced at a rate of 36 boxes per day. The shop operates 20 days a month. Assume that demand is
uniform throughout the month. Setup cost is $60 for a run, and holding cost is $2 per box on a monthly basis.
Determine the following:
(A) the economic run size
(B) the maximum inventory
(C) the number of days in a run
The daily usage rate (u) is 18 boxes. The daily production rate (p) is 36 boxes.
A)
B)
C)
Feedback: Use the EPQ and Imax formulas. Days per run is the EPQ divided by the production rate.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

47
112. Estimated demand for goldfilled lockets at Sam's Bargain Jewelry and Housewares is 2,420 lockets a year.
Manager Veronica Winters has indicated that ordering cost is $45, and that the following price schedule applies:
1 to 599 lockets, $.90 each; 600 to 1,199 lockets, $.80 each; and 1,200 or more, $.75 each. What order size will
minimize total cost if carrying cost is $.18 per locket on an annual basis?
D = 2,420 lockets per year
S = $45
H = $.18 per locket

Hence, the most attractive order quantity is 1,200 units.
Feedback: Since the first calculated quantity is in the range of feasibility for $.80 per unit, compare the total
cost of 1,100 @ $.80 each with the total cost of 1,200 @ $.75 each.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

48
113. Suppose that you are the manager of a production department that uses 400 boxes of rivets per year. The
supplier quotes you a price of $8.50 per box for an order size of 199 boxes or less, a price of $8.00 per box for
orders of 200 to 999 boxes, and a price of $7.50 per box for an order of 1,000 or more boxes. You assign a
holding cost of 20 percent of the price to this inventory. What order quantity would you use if the objective is to
minimize total annual costs of holding, purchasing, and ordering? Assume ordering cost is $80/order.
D = 400 boxes per year
S = $80
H = .20P

Thus, the best choice is to buy 200 per order at a price of $8.00 per unit.
Feedback: The lowest curve with its minimum in the feasible range is $8.00, where Q = 200. Hence, compare
the total cost of 200 @ $8.00 each and the total cost of 1,000 @ $7.50 each.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

49
114. The operator of a concession at a downtown location estimates that he will sell 400 bags of circus peanuts
during a month. Carrying costs are 17 percent of unit price and ordering cost is $22. The price schedule for bags
of peanuts is: 1 to 199, $1.00 each; 200 to 499, $.94 each; and 500 or more $.87 each. What order size would be
most economical?
D = 400 bags per year
S = $22
H = .17P

Thus, the best choice is to buy 500 per order at a price of $.87 per unit.
Feedback: The lowest curve with a feasible EOQ is the $.94 curve. Hence, compare total cost of 332 bags @
$.94 each with the total cost of 500 @ $.87 each.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

50
115. A dry cleaning firm uses an average of 20 gallons of cleaning fluid a day. Usage tends to be normally
distributed with a standard deviation of two gallons per day. Lead time is four days, and the desired service
level is 92 percent. What amount of safety stock is appropriate if a fixed order size of 600 gallons is used?
= 20 gallons per day; = 2 gallons per day
LT = 4 days
SL = 92 percent (Z = 1.41)

Feedback: Multiply an appropriate Zvalue by the standard deviation of demand and the square root of the lead
time.
AACSB: Analytic
Blooms: Apply
Difficulty: Hard

116. Suppose that usage of cooking oil at Harry's Fish Fry is normally distributed with an average of 15
gallons/day and a standard deviation of two gallons/day. Harry has just fired the manager and taken over
operating the restaurant himself. Harry has asked you to help him decide how to reorder cooking oil in order to
achieve a service level which is seven times the risk of stockout (7/8). Lead time is eight days. Assume that
cooking oil can be ordered as needed.
= 15 gallons per day; = 2 gallons per day
LT = 8 days
SL = 7/8 = 87.5 percent (Z = 1.15)
For the continuous review system, the correct reorder point should be:

Feedback: Use the basic ROP formula.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

51
117. A bakery's use of corn sweetener is normally distributed with a mean of 80 gallons per day and a standard
deviation of four gallons per day. Lead time for delivery of the corn sweetener is normal with a mean of six
days and a standard deviation of two days. If the manager wants a service level of 99 percent, what reorder
point should be used?
For a 99 percent service level, the appropriate zvalue is 2.33. Given this, the reorder point should be:

AACSB: Analytic
Blooms: Apply
Difficulty: Hard

118. A manager reorders lubricant when the amount onhand reaches 422 pounds. Average daily usage is 45
pounds, which is normally distributed with a standard deviation of three pounds per day. Lead time is nine days.
What is the risk of a stockout?
= 45 lbs. per day; = 3 lbs. per day; LT = 9 days
If the ROP is 422, this means the safety stock is equal to 17 units.
If the safety stock equals 17 units, then solving for z, we get
A zvalue of 1.89 implies that the probability of a stockout is .0294, so the risk of a stockout is about 3 percent.
Feedback: Given the reorder point, solve for Z, then interpret the probability associated with that Z.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

52
119. Given the following information:
Order quantity = 300; = 20 units; desired lead time service level = .86.
Find:
(A) the expected number of units short per cycle
(B) the annual service level
A) E(n) = E(z) ; for a lead time service level of .8599, E(z) = .071.
Thus, E(n) = .071(20 units) = 1.42.
B) 1 SLannual = = .0047
Solving for SLannual, we get SLannual = 1 .0047 = .9953 or 99.53%
Feedback: Use cycle and annual service level approaches.
AACSB: Analytic
Blooms: Apply
Difficulty: Hard

53
120. A company can produce a part it uses in an assembly operation at the rate of 50 an hour. The company
operates eight hours a day, 300 days a year. Daily usage of the part is 300 parts. The company uses the part
every day. The run size is 6,000 parts. The annual holding cost is $2 per unit, and setup cost is $100.
(A) How many runs per year will there be?
(B) While production is occurring, how many parts per day are being added to inventory?
(C) Assuming that production begins when there are no parts on hand, what is the maximum number of parts in
inventory?
(D) The machine is dedicated to this product. Every so often, preventive maintenance, which requires six
working days, must be performed on it. Does this interrupt production cycles, or is there enough time between
cycles to perform the maintenance? Explain.
(A) Annual demand = (300 parts/day) x (300 days/yr.) = 90,000 parts/yr.
Annual demand/Run quantity = 90000/6000 = 15 runs/yr.
(B) Inventory buildup = p u = 400 300 = 100 parts/day.
(C) Production takes 15 days: 6000 parts/400 parts/day = 15 days.
Buildup is 100 parts/day x 15 days = 1500 parts.
(D) Usage is 300 parts/day for 6 days = 1800 parts, but maximum inventory is only 1500 parts. Yes, it would
interrupt production.
Feedback: Use EPQ formulas and interpret.
AACSB: Analytic
Blooms: Apply
Difficulty: Hard

54
121. The injection molding department of a company uses 40 pounds of a powder a day. Inventory is reordered
when the amount on hand is 240 pounds. Lead time averages five days. It is normally distributed and has a
standard deviation of two days. What is the probability of a stockout during lead time?

= 5 days; = 2
As on average 200 pounds are needed during lead time, a ROP of 240 pounds implies a safety stock of 40
pounds. With , the zvalue is 0.5. This implies a probability of a stockout
of .3085.
Feedback: Solve for Z, and then find the cumulative probability associated with that Z.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

122. A shop owner uses a reorder point approach to restocking a certain raw material. Lead time is six days.
Usage of the material during lead time is normally distributed with a mean of 42 pounds and a standard
deviation of 4 pounds. When should the raw material be reordered if the acceptable risk of a stockout is 3%?
LT = 6 days
Expected demand during lead time = 42 pounds
Standard deviation of leadtime demand = 4 pounds
z = 1.88 for SL of 1.00 .03
ROP = expected demand during lead time + z
= 252 + 1.88(4) = 259.52 pounds.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

55
123. The manager of a bakery orders three 'caketogo' wedding cakes every Saturday to accommodate last
minute purchases. Demand for the cakes can be described by a Poisson distribution that has a mean of 2. The
cakes cost $10 each to prepare, and they sell for $26 each. Any cakes that haven't been sold by the end of the
day are sold for half price the next day. Usually, half of those are sold and the rest are tossed. What stocking
level would be appropriate?
Cs = $26 $10 = $16
Ce = $10 .5($13) = $3.50
SL = = .82
For Poisson with mean = 2.0, this falls between .677 and .857.
Therefore, stock 3 cakes.
Feedback: Stock until the cumulative probability of demand first exceeds this ratio.
AACSB: Analytic
Blooms: Apply
Difficulty: Hard

56
124. A manager has just received a revised price schedule from a vendor. What order quantity should the
manager use in order to minimize total costs? Annual Demand is 120 units, ordering cost is $8, and annual
carrying cost is $1 per unit.

Because this is in the 4059 range, compare TC of Q = 44 @ $13, Q = 60 @ $12, and Q = 90 @ $11:

Feedback: The EOQ for the 4059 range is the lowest feasible EOQ. Compare this quantity's total cost to the
total cost of minimum quantities in the lower price ranges.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

A manufacturer is contemplating a switch from buying to producing a certain item. Setup cost would be the
same as ordering cost. The production rate would be about double the usage rate.
Stevenson Chapter 13

57
125. Compared to the EOQ, the economic production quantity would be approximately:
A. the same
B. 20 percent larger
C. 40 percent larger
D. 20 percent smaller
E. 40 percent smaller
The EPQ will be larger than the EOQ.
Blooms: Understand
Difficulty: Hard

126. Compared to the EOQ, the maximum inventory would be approximately:
A. 70 percent higher
B. 30 percent higher
C. the same
D. 30 percent lower
E. 70 percent lower
Maximum inventory is smaller under an EPQ than an EOQ.
Blooms: Understand
Difficulty: Hard

The manager of the Quick Stop Corner Convenience Store (which never closes) sells four cases of Stein beer
each day. Order costs are $8.00 per order, and Stein beer costs $.80 per sixpack (each case of Stein beer
contains four sixpacks). Orders arrive three days from the time they are placed. Daily holding costs are equal to
five percent of the cost of the beer.

58
127. At what point should he reorder Stein beer?
A. 0 cases remaining
B. 4 cases remaining
C. 12 cases remaining
D. 16 cases remaining
E. 20 cases remaining
Use the basic reorder point with no demand uncertainty.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

128. If he were to order 16 cases of Stein beer at a time, what would be the length of an order cycle?
A. 0.25 days
B. 3 days
C. 1 day
D. 4 days
E. 20 days
Divide the order quantity by the demand rate to get the length of an order cycle.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

59
129. If he were to order 16 cases of Stein beer at a time, what would be the average inventory level?
A. 4 cases
B. 12 cases
C. 8 cases
D. 20 cases
E. 16 cases
Divide the order quantity by two.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

130. If he were to order 16 cases of Stein beer at a time, what would be the daily total inventory costs,
EXCLUDING the cost of the beer?
A. $2.00
B. $4.00
C. $1.28
D. $3.28
E. $2.56
Multiply the average inventory by the holding cost.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

60
131. What is the economic order quantity for Stein beer?
A. 8 cases
B. 11 cases
C. 14 cases
D. 20 cases
E. 32 cases
Use the basic EOQ formula.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

Ann Chovies, owner of the Perfect Pasta Pizza Parlor, uses 20 pounds of pepperoni each day in preparing
pizzas. Order costs for pepperoni are $10.00 per order, and carrying costs are 4 cents per pound per day. Lead
time for each order is 3 days, and the pepperoni itself costs $3.00 per pound.

132. At what point should she reorder pepperoni?
A. 20 pounds remaining
B. 40 pounds remaining
C. 60 pounds remaining
D. 80 pounds remaining
E. 100 pounds remaining
Multiply the demand rate by the lead time.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

61
133. If she were to order 80 pounds of pepperoni at a time, what would be the length of an order cycle?
A. 0 days
B. 0.25 days
C. 3 days
D. 4 days
E. 5 days
Divide the order quantity by the demand rate.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

134. If she were to order 80 pounds of pepperoni at a time, what would be the average inventory level?
A. 20 pounds
B. 40 pounds
C. 60 pounds
D. 80 pounds
E. 100 pounds
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

62
135. If she were to order 80 pounds of pepperoni at a time, what would be the total daily costs, including the
cost of the pepperoni?
A. $60.00
B. $63.20
C. $64.00
D. $64.10
E. $65.00
Add the holding cost to the ordering cost and the cost of the pepperoni.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

136. What is the economic order quantity for pepperoni?
A. 20 pounds
B. 40 pounds
C. 60 pounds
D. 80 pounds
E. 100 pounds
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

63
The Operations Manager for Shadyside Savings & Loan orders cash from her home office for her very popular
"BIG BUCKS" automated teller machine, which only dispenses $100 bills. She estimates that this machine
dispenses an average of 12,500 bills per month, and that carrying a bill in inventory costs 10 percent of its value
annually. She knows that each order for these bills costs $300 for clerical and armored car delivery costs, and
that order lead time is six days.

137. Assuming a thirtyday month, at what point should bills be reordered?
A. 0 bills remaining
B. 417 bills remaining
C. 2,500 bills remaining
D. 10,000 bills remaining
E. 12,500 bills remaining
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

64
138. Assuming a thirtyday month, if she were to order 6,000 bills at a time, what would be the length of an
order cycle?
A. 0.48 days
B. 2.08 days
C. 6 days
D. 8.4 days
E. 14.4 days
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

139. If she were to order 6,000 bills at a time, what would be the dollar value of the average inventory level?
A. $3,000
B. $6,000
C. $12,500
D. $300,000
E. $600,000
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

65
140. If she were to order 6,000 bills at a time, what would be the average monthly total costs, EXCLUDING the
value of the bills?
A. $625
B. $1,250
C. $2,500
D. $3,125
E. $37,500
Add the ordering and holding costs.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

141. What is the economic order quantity?
A. 600 bills
B. 3,000 bills
C. 949 bills
D. 6,215 bills
E. 12,500 bills
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

66
Given the following data for a particular inventory item:


142. What is the economic order quantity for this item?
2,000 units
Feedback: Use the basic EOQ formula.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

143. For the economic order quantity, what is the length of an order cycle?
4 weeks
Feedback: Divide the order quantity by the demand rate.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

67
144. For the economic order quantity, what is the reorder point?
1,500 units
Feedback: Multiply the lead time by the demand rate.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

145. For the economic order quantity, what is the average inventory level?
1,000 units
Feedback: Divide the order quantity by two.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

146. For the economic order quantity, what are average weekly ordering costs?
$10
Feedback: Divide the demand rate by the order quantity, then multiply by perorder cost.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

68
147. For the economic order quantity, what are average weekly carrying costs?
$10
Feedback: Divide the order quantity by two, then multiply by the periodic holding cost.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

148. For the economic order quantity, what are average weekly total costs, including the cost of the inventory
item?
$270
Feedback: Multiply the demand rate by the cost of the item, then add to the holding and ordering costs.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

The materials manager for a billiard ball maker must periodically place orders for resin, one of the raw
materials used in producing billiard balls. She knows that manufacturing uses resin at a rate of 50 kilograms
each day, and that it costs $.04 per day to carry a kilogram of resin in inventory. She also knows that the order
costs for resin are $100 per order, and that the lead time for delivery is four (4) days.

69
149. At what point should resin be reordered?
A. 0 kilograms remaining
B. 50 kilograms remaining
C. 200 kilograms remaining
D. 400 kilograms remaining
E. 500 kilograms remaining
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

150. If order size was 1,000 kilograms of resin, what would be the length of an order cycle?
A. 0.05 days
B. 4 days
C. 16 days
D. 20 days
E. 50 days
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

70
151. If the order size was 1,000 kilograms of resin, what would be the average inventory level?
A. 50 kilograms
B. 200 kilograms
C. 500 kilograms
D. 800 kilograms
E. 1,000 kilograms
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

152. If the order size was 1,000 kilograms of resin, what would be the daily total inventory costs, EXCLUDING
the cost of the resin?
A. $5
B. $10
C. $20
D. $25
E. $40
Multiply the average inventory by the holding cost.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

71
153. What is the economic order quantity for resin?
A. 50 kilograms
B. 100 kilograms
C. 250 kilograms
D. 500 kilograms
E. 1,000 kilograms
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

154. A firm stocks a seasonal item that it buys for $22/unit and sells for $29 unit. During the season, daily
demand can be described using a Poisson distribution with a mean of 2.4. Because of the nature of the item,
units remaining at the close of business each day must be removed at a cost of $2 each. What is the optimum
stocking level, and what is the effective service level?
Cs = $29 $22 = $7
Ce = $22 + $2 = $24

For a Poisson distributed variable with a mean of 2.4, this SL falls between the cumulative probabilities
associated with levels of 0 and 1 unit. Hence, stock 1 unit.
Feedback: At that stocking level, the (effective) service level is .308.
AACSB: Analytic
Blooms: Apply
Difficulty: Hard

72
155. Joe's Coffee Shoppe has fresh doughnuts delivered each morning. Daily demand for plain doughnuts is
approximately normal with a mean of 200 and a standard deviation of 15. Joe pays $1.20 per dozen and has a
standing order for 16 dozen. Joe and the staff eat any leftovers. What is the implied shortage cost?

= 15
Ce = $1.20 per dozen
The stocking level is 12(16) = 192, which implies a service level of .2981.
If .2981 = and Ce $1.20 per dozen, solving for Cs leads to an estimated Cs of $.51 per dozen.
Feedback: Given the implied service level and the excess cost, solve for the implied shortage cost.
AACSB: Analytic
Blooms: Apply
Difficulty: Hard

156. A restaurant prepares Peking Duck daily at a cost of $18 per duck. Each duck generates revenue of $47 if
sold. Demand for Peking Duck can be described by a Poisson distribution with a mean of 4.2 ducks per day.
Unsold ducks at the end of each day are converted to duck soup at an additional cost of $5 over and above the
resulting value as soup. How many ducks should be prepared each day?

SL = = .5577
For a Poisson distributed variable with a mean of 4.2, this SL falls between the cumulative probabilities
associated with levels of 3 and 4 units. Hence, stock four ducks.
Feedback: Stocking four ducks leads to an (effective) service level of .59.
AACSB: Analytic
Blooms: Apply
Difficulty: Hard

73
157. A machine is expected to use approximately three spare parts during its useful life. The spares cost $200
each and have no salvage value or other use. The manager has ordered five spares. Assuming a Poisson usage
rate, what range of shortage cost is implied?
Ce = $200
Mean = 3 (Poisson)
Cs = ?
Assuming a Poissondistributed variable with a mean of 3, if stocking 5 units is optimal, this implies that the
optimal service level must be between .815 and .916
Thus,
Solving for Cs yields a range of Cs from $881.08 to $2,180.95.
Feedback: Solve for shortage cost that leads to a service level falling within the range (inclusive) of 0.815 and
0.916.
AACSB: Analytic
Blooms: Apply
Difficulty: Hard

74
158. A manager intends to order a new machine and must now decide on the number of spare parts to order
along with the machine. The parts cost $400 each and have no salvage value. The manager has compiled a
frequency distribution for the probable usage of spare parts, as shown. For what range of shortage costs would
stocking one spare part constitute an optimal decision?
Number of

Ce = $400
In order for a stocking level of one part to be optimal, the service level must fall in the range .08 to .38 (see
frequency distribution). Thus,

Setting the service level ratio equal to .08 yields Cs = $34.78.
Setting the service level ratio equal to .38 yields Cs = $245.16.
Hence the range of shortage costs for a stocking level of one to be optimal is $34.78 to $245.16.
0.38.
AACSB: Analytic
Blooms: Apply
Difficulty: Hard

The Corner Newsstand has demand for a certain weekly magazine that can be approximated by a Poisson
distribution with a mean of 9.0. Magazines are purchased for $1.50.

75
159. If unsold copies can be returned for half credit and the owner stocks ten copies, what is the implied range
of shortage cost?
Ce = $.75
Given Poissondistributed demand with a mean of 9.0, the optimum service level must be between .587 and .
706.

Service level of .587 implies Cs = $1.07
Service level of .706 implies Cs = $1.80
Thus the range of shortage costs implied by stocking ten copies is $1.07 to $1.80.
0.706.
AACSB: Analytic
Blooms: Apply
Difficulty: Hard

160. If unsold copies must be destroyed and copies sell for $4.00 each, find the optimum stocking level.
Ce = $1.50 Cs = $4.00 1.50 = $2.50

Given Poissondistributed demand with a mean of 9.0, this SL falls between 9 and 10 units. Thus, we would
stock 10 copies.
Feedback: Compare the service level ratio to the cumulative distribution of demand with Poissondistributed
demand with a mean of 9.0.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

76
161. If unsold copies can be returned for half credit and copies sell for $4.25 each, find the optimal stocking
level.
Ce = $1.50/2 = $.75 Cs = $4.25 1.50 = $2.75

Given Poissondistributed demand with a mean of 9.0, this SL falls between 10 and 11 units. Stock 11 copies of
each issue.
Feedback: Compare the service level ratio to the cumulative distribution of demand with Poissondistributed
demand with a mean of 9.0.
AACSB: Analytic
Blooms: Apply
Difficulty: Medium

162. Demand for a component averages 80 units per week, with a weekly standard deviation of demand of 14
units. The current supplier of this component offers a fourweek lead time. Stockout risk is to be kept at 8%.
Assume that it costs $50 to hold one unit in inventory for a year. Suppose the annual cost for the items would be
$500 higher if they were purchased from another vendor, but that vendor would offer a twoweek lead time.
Would it be better to go with the moreexpensive but moreresponsive vendor?
Yes, using the second vendor would be cheaper overall.
Feedback: Required safety stock for the cheaperbutslower vendor would be approximately 39 units. Required
safety stock for the moreexpensivebutfaster vendor would be approximately 28 units. The $550 reduction in
annual holding costs would more than offset the greater expense in purchase costs.
AACSB: Analytic
Blooms: Apply
Difficulty: Hard

77

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Chapter 13 Inventory Management

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