Explaination of the answers are all at the last of the page
1. Costs of not carrying enough inventory include:
A. Lost sales.
B. Customer disappointment.
C. Possible worker layoffs.
D. All of these.
ANSWER: D
2. EOQ is the order quantity that ……… over our planning horizon.
A. Minimizes total ordering costs
B. Minimizes total carrying costs
C. Minimizes total inventory costs
D. The required safety stock
ANSWER: C
3. Below are the reason for holding cash except:
A. Transaction motive
B. Speculative motive
C. Retaining motive
D. Compensating motive
ANSWER: C
4. The objective of inventory management is to
A. decouple various parts of the production process.
B. strike a balance between inventory investment and customer service.
C. take advantage of quantity discounts.
D. provide a selection of goods for anticipated customer demand.
ANSWER: B
5. Which of the following types of inventory describes inventory that has been purchased but not process
ed?
A. finished-goods inventory
B. raw material inventory
C. maintenance/repair/operating supply inventory
D. work-in-process inventory
ANSWER: B
6. 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.
ANSWER: D
7. 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
ANSWER: D
8. Which one of the following is not generally a determinant of the reorder point?
A. rate of demand
B. length of lead time
C. stockout risk
D. purchase cost
ANSWER: D
9. Which among the following components is calculated as the sum of the fixed costs that happen each ti
me an item is ordered?
A. Carrying cost
B. Order cost
C. Holding cost
D. Storing cost
ANSWER: B
10. The price reductions offered to customers for large orders, to encourage them to purchase in large qu
antities is known as ___.
A. Freebies
B. Quantity discounts
C. Normal discounts
D. Premiums
ANSWER: B
11. A company that maintains a sufficient safety margin by having extra inventory against certain situation
s is termed as ___.
A. inventory
B. lot size
C. safety stock
D. lead time
ANSWER: C
12. Which among the following costs is the expense of storing inventory for a specified period of time?
A. Purchasing cost
B. Carrying cost
C. Financial cost
D. Storing cost
ANSWER: B
Explaination to the answer mentioned above for each question.
1) Costs of not carrying enough inventory include lost sales, customer disappointment, and possible work
er layoffs. These costs can result from inadequate stock levels, leading to missed opportunities, dissatisfi
ed customers, and potential negative impacts on staffing.
2) EOQ (Economic Order Quantity) is the order quantity that minimizes total inventory costs over our plan
ning horizon. It considers both ordering costs and carrying costs to determine the optimal quantity to order
.
3) The reason for holding cash does not include a "retaining motive." The typical motives for holding cash
are the transaction motive (to meet routine expenses), speculative motive (to take advantage of investme
nt opportunities), and compensating motive (to offset unexpected cash outflows).
4) The objective of inventory management is to strike a balance between inventory investment and custo
mer service. It aims to optimize the level of inventory to meet customer demand while minimizing costs as
sociated with holding inventory.
5) Raw material inventory describes inventory that has been purchased but not yet processed. It consists
of the materials and components that are used in the production process.
6) The assumption of the basic EOQ model does not include the availability of quantity discounts. The mo
del assumes known and constant demand, consistent lead time, and each order being received in a singl
e delivery.
7) In the basic EOQ model, if lead time increases from five to 10 days, the EOQ (Economic Order Quantit
y) will remain the same. The EOQ calculation is not affected by changes in lead time.
8) The reorder point is not generally determined by purchase cost. It is primarily influenced by the rate of
demand, length of lead time, and stockout risk. Purchase cost relates to the cost of acquiring the inventor
y rather than the reorder point.
9) Order cost is calculated as the sum of the fixed costs that occur each time an item is ordered. It include
s expenses such as order processing, paperwork, and coordination costs.
10) Quantity discounts refer to the price reductions offered to customers for large orders, encouraging the
m to purchase in larger quantities. This incentive can lead to cost savings for the customer and increased
sales volume for the supplier.
11) Safety stock is the extra inventory a company maintains as a sufficient margin against certain situatio
ns, such as variability in demand or supply disruptions. It acts as a buffer to prevent stockouts and maintai
n customer service levels.
12) Carrying cost is the expense of storing inventory for a specified period of time. It includes costs such a
s warehousing, storage facilities, insurance, obsolescence, and depreciation.
