Oper3100 Exam2 Chp17

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Oper3100 Exam2 Chp17
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2014-03-04 09:49:04
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Operations management
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Exam 2 Chp17 test bank
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  1. Which of the following is not one of the categories of manufacturing inventory?
    (p. 559)
    Just-in-time. Manufacturing inventory is typically classified into raw materials, finished products, component parts, supplies, and work-in-process.
  2. Which of the following is one of the categories of manufacturing inventory?
    (p. 559)
    Work-in-process. Manufacturing inventory is typically classified into raw materials, finished products, component parts, supplies, and work-in-process.
  3. Firms keep supplies of inventory for which of the following reasons?
    (p. 559)
    To meet variation in product demand. 

    • All firms keep a supply of inventory for the following reasons:
    • 1. To maintain independence of operations.
    • 2. To meet variation in product demand.
    • 3. To allow flexibility in production scheduling.
    • 4. To provide a safeguard for variation in raw material delivery time.
    • 5. To take advantage of economic purchase order size.
  4. Which of the following is not a reason to carry inventory?

    (p. 559)
    • To keep the stock out of the hands of competitors
    • All firms keep a supply of inventory for the following reasons:
    • 1. To maintain independence of operations.
    • 2. To meet variation in product demand.
    • 3. To allow flexibility in production scheduling.
    • 4. To provide a safeguard for variation in raw material delivery time.
    • 5. To take advantage of economic purchase order size.
  5. When developing inventory cost models, which of the following is not included as costs to place an order?
    (p. 559 & 560)
    Taxes. There are costs to place an order: labor, phone calls, typing, postage, and so on. Therefore, the larger each order is, the fewer the orders that need to be written. Also, shipping costs favor larger orders—the larger the shipment, the lower the per-unit cost. Ordering costs refer to the managerial and clerical costs to prepare the purchase or production order. Ordering costs include all the details, such as counting items and calculating order quantities. The costs associated with maintaining the system needed to track orders are also included in ordering costs.
  6. When material is ordered from a vendor, which of the following is not a reason for delays in the order arriving on time? 
    (p. 559)
    • Redundant ordering systems
    • When material is ordered from a vendor, delays can occur for a variety of reasons: a normal variation in shipping time, a shortage of material at the vendor's plant causing backlogs, an unexpected strike at the vendor's plant or at one of the shipping companies, a lost order, or a shipment of incorrect or defective material.
  7. Which of the following is not included as an inventory holding cost?
    (p. 560- 561)
    • Annualized cost of materials. Holding costs include the costs for storage facilities, handling, insurance, pilferage, breakage,
    • obsolescence, depreciation, taxes, and the opportunity cost of capital.
  8. Which of the following is usually included as an inventory holding cost?
    (p. 560- 561)
    Breakage. Holding costs include the costs for storage facilities, handling, insurance, pilferage, breakage, obsolescence, depreciation, taxes, and the opportunity cost of capital.
  9. In making any decision that affects inventory size, which of the following costs do not need to be considered?
    (p. 559- 560)
    Fixed costs. 

    • In making any decision that affects inventory size, the following costs must be considered.1. Holding (or carrying) costs.2. Setup (or production change) costs.3. Ordering costs.
    • 4. Shortage costs.
  10. Which of the following is fixed-order quantity inventory model?

    (p. 565)
    Economic order quantity model. There are two general types of multi-period inventory systems: fixed-order quantity models (also called the economic order quantity, EOQ, and Q-model) and fixed-time period models (also referred to variously as the periodic system, periodic review system, fixed order interval system, and P-model).
  11. Which of the following is fixed-time period inventory model?
    (p. 565)
    Periodic system model. There are two general types of multi-period inventory systems: fixed-order quantity models (also called the economic order quantity, EOQ, and Q-model) and fixed-time period models (also referred to variously as the periodic system, periodic review system, fixed order interval system, and P-model).
  12. Which of the following is a perpetual system for inventory management?
    (p. 565)
    Fixed-order quantity. The fixed-order quantity model is a perpetual system, which requires that every time a withdrawal from inventory or an addition to inventory is made, records must be updated to reflect whether the reorder point has been reached.
  13. Which of the following is an assumption of the basic fixed-order quantity inventory model?
    (p. 567)
    Price per unit of product is constant. 

    • These assumptions are unrealistic, but they represent a starting point and allow us to use a simple example:
    • Demand for the product is constant and uniform throughout the period.
    • Lead time (time from ordering to receipt) is constant.
    • Price per unit of product is constant.
    • Inventory holding cost is based on average inventory.
    • Ordering or setup costs are constant.
    • All demands for the product will be satisfied. (No backorders are allowed.)
    • AACSB: AnalyticBloo
  14. 66. Which of the following is not an assumption of the basic fixed-order quantity inventory model?
    (p. 567)
    A. Ordering or setup costs are constant
    B. Inventory holding cost is based on average inventory
    C. Diminishing returns to scale of holding inventory
    D. Lead time is constant
    E. Demand for the product is uniform throughout the period
    C. 

    • These assumptions are unrealistic, but they represent a starting point and allow us to use a simple example:
    • Demand for the product is constant and uniform throughout the period.
    • Lead time (time from ordering to receipt) is constant.
    • Price per unit of product is constant.
    • Inventory holding cost is based on average inventory.
    • Ordering or setup costs are constant.
    • All demands for the product will be satisfied. (No backorders are allowed.)
  15. Which of the following is the symbol used in the textbook for the cost of placing an order in the fixed-order quantity inventory model?
    (p. 567)
     
    S. S = Setup cost or cost of placing an order
  16. Which of the following is the set of all cost components that make up the fixed-order quantity total annual cost (TC) function? 
    (p. 567)
    • Annual holding cost, annual ordering cost, annual purchasing cost
    • Total Annual Cost = Annual Purchase Cost + Annual Ordering Cost + Annual Holding Cost
  17. Assuming no safety stock, what is the re-order point (R) given an average daily demand of 50 units, a lead time of 10 days and 625 units on hand? 
    (p. 568)
    500. See equation 17.4. Fifty (50) times ten (10) equals 500.
  18. Assuming no safety stock, what is the reorder point (R) given an average daily demand of 78 units and a lead time of 3 days?
    (p. 568)
     
    234. See equation 17.4. 78 times 3 = 234
  19. If annual demand is 12,000 units, the ordering cost is $6 per order and the holding cost is $2.50 per unit per year, which of the following is the optimal order quantity using the fixed-order quantity model? 
    (p. 568)
     
    240. From equation 17.3, Q = 240 = Square root of (2 x 12,000 x 6/2.5)
  20. If annual demand is 50,000 units, the ordering cost is $25 per order and the holding cost is $5 per unit per year, which of the following is the optimal order quantity using the fixed-order quantity model?
    (p. 568)
     
    707. From equation 17.3, Q = 707.1 = Square root of (2 x 50,000 x 25/5)
  21. If annual demand is 35,000 units, the ordering cost is $50 per order and the holding cost is $0.65 per unit per year, which of the following is the optimal order quantity using the fixed-order quantity model? 
    (p. 568)
    2320. From equation 17.3, Q = 2,320.5 = Square root of (2 x 35,000 x 50/0.65)
  22. Using the fixed-order quantity model, which of the following is the total ordering cost of inventory given an annual demand of 36,000 units, a cost per order of $80 and a holding cost per unit per year of $4? 
    (p. 568)
     
    2400. From equation 17.3, Q = 1,200 = Square root of (2 x 36,000 x 80/4). Number of orders per year = 36,000/1,200 = 30 x $80 = $2,400
  23. A company is planning for its financing needs and uses the basic fixed-order quantity inventory model. Which of the following is the total cost (TC) of the inventory given an annual demand of 10,000, setup cost of $32, a holding cost per unit per year of $4, an EOQ of 400 units, and a cost per unit of inventory of $150? 
    (p. 567)
     
    $1,501,600. Use equation 17.2 on page 567. Q = 400. Average Inventory = Q/2 = 200. Holding cost/year = $4. Thus, annual holding cost = $800. Annual set-up cost = 10,000/400 = 25 x $32 = 800. Demand x cost per unit = 10,000 x $150 = 1,500,000. Hence, TC = $1,500,000 + 800 + 800 = $1,501,600.
  24. A company has recorded the last five days of daily demand on their only product. Those values are 120,125, 124, 128, and 133. The time from when an order is placed to when it arrives at the company from its vendor is 5 days. Assuming the basic fixed-order quantity inventory model fits this situation and no safety stock is needed, which of the following is the reorder point (R)? 
    (p. 568)
     
    • 630. Using equation 17.4, Average demand is 120 + 125 + 124 + 128 + 133/5 = 126. Lead time = 5 days so the reorder point is 126 x 5 = 630.
  25. A company has recorded the last six days of daily demand on a single product they sell. Those values are 37, 115, 93, 112, 73, and 110. The time from when an order is placed to when it arrives at the company from its vendor is 3 days. Assuming the basic fixed-order quantity inventory model fits this situation and no safety stock is needed, which of the following is the reorder point (R)? 
    (p. 568)
    270. Using equation 17.4, Average demand is 37 + 115 + 93 + 112 + 73 + 110/6 = 90. Lead time = 3 days so the reorder point is 90 x 3 = 270.
  26. Using the probability approach to determine an inventory safety stock and wanting to be 95 percent sure of covering inventory demand, which of the following is the number of standard deviations necessary to have the 95 percent service probability assured? 
    (p. 570)
     
    1.64

    Companies using this approach generally set the probability of not stocking out at 95 percent. This means we would carry about 1.64 standard deviations of safety stock.
  27. To take into consideration demand uncertainty in reorder point (R) calculations, what do we add to the product of the average daily demand and lead time in days when calculating the value of R?
    (p. 571- 572)
    • The product of the standard deviation of demand variability and a "z" score relating to a specific service probability.
    • For example, suppose we computed the standard deviation of demand to be 10 units per day. If our lead time to get an order is five days, the standard deviation for the five-day period, assuming each day can be considered independent, is (equation 17.8) and multiplied by the z-score (equation 17.9).
  28. In order to determine the standard deviation of usage during lead time in the reorder point formula for a fixed-order quantity inventory model which of the following must be computed first? 

    (p. 571)
    Standard deviation of daily demand. See equation 17.8.
  29. If it takes a supplier four days to deliver an order once it has been placed and the standard deviation of daily demand is 10, which of the following is the standard deviation of usage during lead time?
    (p. 571)
    20. From equation 17.8, The standard deviation of usage during lead time is equal to the square root of the sums of the variances of the number of days of lead time. Since variance equals standard deviation squared, the standard deviation of usage during lead time is the square root of 4(10x10) = square root of 400 = 20.
  30. If it takes a supplier 25 days to deliver an order once it has been placed and the standard deviation of daily demand is 20, which of the following is the standard deviation of usage during lead time? 
    (p. 571)
     
    100. Using equation 17.8 (page 571), the standard deviation of usage during lead time will be the square root of 25 x (20 x 20) = square root of 10,000 = 100.
  31. If it takes a supplier two days to deliver an order once it has been placed and the daily demand for three days has been 120, 124, and 125, which of the following is the standard deviation of usage during lead time? 
    (p. 571)
     
    About 3.06

    The standard deviation (Equation 17.6) of daily demand = Square root of (14/3) = 2.1602. This number squared is 4.6667. The square root of (2 (days) times 4.6667) = the square root of 9.3333 or 3.055.* (Note to instructor: The Feedback above is based on the text's equation 17.6 which calculates standard deviation based on a denominator of "n" rather than the classic statistical "n-1." If then-1 formulation is used the result would be SD = SQRT 7. Variance, then is 7. 2 x 7 = 14 and SQRT 14 = 3.742 which would be the appropriate response. If your students are inclined to use the classical statistical formulation of standard deviation you should adjust the choices appropriately.)
  32. A company wants to determine its reorder point (R). Demand is variable and they want to build a safety stock into R. If the average daily demand is 12, the lead time is 5 days, the desired "z" value is 1.96, and the standard deviation of usage during lead time is 3, which of the following is the desired value of R? 
    (p. 571)
     
    • About 66. Equation 17.5 is (average daily demand times number of days of lead time) plus (standard deviation during lead time) times (desired Z score) =
    • (12 x 5) + (3x1.96) = 60 + 5.88 = 65.88 = 66 units
  33. A company wants to determine its reorder point (R). Demand is variable and they want to build a safety stock into R. The company wants to have a service probability coverage of 95 percent. If average daily demand is 8, lead time is 3 days, and the standard deviation of usage during lead time is 2, which of the following is the desired value of R? 
    (p. 571)
     
    About 27.3

    Desired z score for service probability coverage of 95% = 1.64. Equation 17.5 (Page 571) is (average daily demand times number of days of lead time) plus (standard deviation during lead time) times (desired z score) = (8 x 3) + (2x1.64) = 24 + 3.28 = 27.28 = about 27.3 units
  34. Which of the following is not necessary to compute the order quantity using the fixed-time period model with safety stock? 
    (p. 573)
     
    Ordering cost. 

    • Equation 17.11 is for a fixed-time period system with safety stock. It requires
    • 1. The number of days between reviews
    • 2. Lead time in days (time between placing an order and receiving it)
    • 3. Forecast average daily demand
    • 4. Number of standard deviations for a specified service probability
    • 5. Standard deviation of demand over the review and lead time
    • 6. Current inventory level (includes items on order)
  35. Using the fixed-time period inventory model, and given an average daily demand of 200 units, 4 days between inventory reviews, 5 days for lead time, 120 units of inventory on hand, a "z" of 1.96, and a standard deviation of demand over the review and lead time of 3 units, which of the following is the order quantity? 
    (p. 573)
     
    About 1,686. Using equation 17.11, q = (200 x (5 + 4) + 1.96 x 3) - 120 =1,800 + 5.88 - 120 = 1,685.88 = about 1,686
  36. Using the fixed-time period inventory model, and given an average daily demand of 75 units, 10 days between inventory reviews, 2 days for lead time, 50 units of inventory on hand, a service probability of 95 percent, and a standard deviation of demand over the review and lead time of 8 units, which of the following is the order quantity?
    (p. 573)
    863. The z score for a service probability of 95% is 1.64. Using equation 17.11 (page 573) q = 75 x (10 + 2) + (1.64 x 8) - 50 = 900 + 13.12 - 50 = 863.12 = 863
  37. Using the fixed-time period inventory model, and given an average daily demand of 15 units, 3 days between inventory reviews, 1 day for lead time, 30 units of inventory on hand, a service probability of 98 percent, and a standard deviation of daily demand is 3 units, which of the following is the order quantity? 

    (p. 574)
    About 42.3

    The z score for a desired service probability of 98% is 2.053. From equation 17.12 (Page 574), the standard deviation during review and lead time is the square root of (4 * 3 squared) which is 6. Using equation 17.11 (page 573) q = 15 x (3 + 1) + (2.05x 6) - 30 = 60 + 12.3 - 30 = 42.3
  38. You would like to use the fixed-time period inventory model to compute the desired order quantity for a company. You know that vendor lead time is 5 days and the number of days between reviews is 7. Which of the following is the standard deviation of demand over the review and lead time if the standard deviation of daily demand is 8? 

    (p. 574)
    About 27.7

    Using equation 17.12 (Page 574), The standard deviation of demand over the 12 days time between reviews and lead time is the square root of (12 x 64) = 27.71.
  39. You would like to use the fixed-time period inventory model to compute the desired order quantity for a company. You know that vendor lead time is 10 days and the number of days between reviews is 15. Which of the following is the standard deviation of demand over the review and lead time period if the standard deviation of daily demand is 10? 
    (p. 574)
     
    50. Using equation 17.12 (Page 574), The standard deviation of demand over the 25 days time between reviews and lead time is the square root of (25 x 100) = 50.
  40. If a vendor has correctly used marginal analysis to select their stock levels for the day (as in the newsperson problem), and the profit resulting from the last unit being sold (Cu) is $0.90 and the loss resulting from that unit if it is not sold (Co) is $0.50, which of the following is the probability of the last unit being sold? 
    (p. 563)
    Greater than 0.357 From equation 17.1 (Page 563) P < = Cu/(Cu + Co) = 0.90/1.40 = 0.643. Since P is the probability that the unit will not be sold and 1 - P is the probability of it being sold, the answer to this question is 1 - 0.643 or 0.357.
  41. If a vendor has correctly used marginal analysis to select their stock levels for the day (as in the newsperson problem), and the profit resulting from the last unit being sold (Cu) is $120 and the loss resulting from that unit if it is not sold (Co) is $360, which of the following is the probability of the last unit being sold? 

    (p. 563)
    Greater than 0.75

    From equation 17.1 (Page 563) P < = Cu/(Cu + Co) = 120 /480 = 0.25. Since P is the probability that the unit will not be sold and 1 - P is the probability of it being sold, the answer to this question is 1 - 0.25 or 0.75.
  42. The Pareto principle is best applied to which of the following inventory systems?

    (p. 578)
    ABC Classification. This logic of the few having the greatest importance and the many having little importance has been broadened to include many situations and is termed the Pareto principle. Most inventory control situations involve so many items that it is not practical to model and give thorough treatment to each item. To get around this problem, the ABC classification scheme divides inventory items into three groupings: high dollar volume (A), moderate dollar volume (B), and low dollar volume (C).
  43. Which of the following are the recommended percentage groupings of the ABC classifications of the dollar volume of products?
    (p. 579)
     
    • A items get 15%, B items get 35%, and C items get 50%. 
    • The ABC approach divides this list into three groupings by value: A items constitute roughly the top 15 percent of the items, B items the next 35 percent, and C items the last 50 percent.
  44. Using the ABC classification system for inventory, which of the following is a true statement?

    (p. 579)
    • The "A" items are of high dollar volume. 
    • The ABC classification scheme divides inventory items into three groupings: high dollar volume (A), moderate dollar volume (B), and low dollar volume (C)
  45. Which of the following values for "z" should we use in as safety stock calculation if we want a service probability of 98%?
    2.05

    Using the Excel function NORMSINV, the z score for a 98% service probability is 2.05.
  46. Computer inventory systems are often programmed to produce a cycle count notice in which of the following case? 
    (p. 581)
     
    When the record shows positive balance but a backorder was written. 

    • The computer can be programmed to produce a cycle count notice in the following cases:
    • 1. When the record shows a low or zero balance on hand.
    • 2. When the record shows a positive balance but a backorder was written
    • 3. After some specified level of activity.
    • 4. To signal a review based on the importance of the item (as in the ABC system).

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