Question 1

When stocked items are sold, the optimal inventory decision using marginal analysis is to stock that quantity where the probable profit from the sale or use of the last unit is equal to or greater than the probable losses if the last unit remains unsold.

Accepted Answer

Marginal analysis is a decision-making tool that evaluates the costs and benefits of producing or stocking one additional unit. In inventory management, the goal is to maximize profits by stocking just enough inventory to meet demand but not so much that there is excess inventory sitting on shelves. The optimal inventory decision using marginal analysis is to stock that quantity where the marginal profit (i.e., the profit from selling one additional unit) is equal to the marginal cost (i.e., the cost of producing or stocking one additional unit). In other words, the probable profit from the sale of the last unit is equal to or greater than the probable losses if the last unit remains unsold.

Question 2

Fixed-order quantity systems assume a random depletion of inventory, with less than an immediate order when a reorder point is reached.

Accepted Answer

Fixed-order quantity systems trigger an immediate order, not a delayed one, when inventory reaches a predetermined reorder point, assuming a constant and known quantity to be reordered.

Question 3

The optimal stocking decision in inventory management, when using marginal analysis, occurs at the point where the benefits derived from carrying the next unit are more than the costs for that unit.

Accepted Answer

The optimal stocking decision in inventory management, using marginal analysis, occurs at the point where the benefits derived from carrying the next unit are equal to the costs for that unit.

Question 4

Safety stock can be defined as the amount of inventory carried in addition to the expected demand.

Accepted Answer

This is the correct definition of safety stock. It is the extra inventory that is kept to serve as a buffer in case unexpected demand or supply chain disruptions occur.

Question 5

The standard fixed-time period model assumes that inventory is never counted but determined by EOQ measures.

Accepted Answer

The standard fixed-time period model requires periodic physical inventory counts to determine the inventory level and adjust the order quantity accordingly. EOQ measures are used to calculate the optimal order quantity but do not determine the actual inventory level.

Question 6

The "sawtooth effect," named after turn around artist Al "Chainsaw" Dunlap, is the severe reduction of inventory and service levels that occurs when a firm has gone through a hostile takeover.

Accepted Answer

The "sawtooth effect" refers to fluctuations in inventory levels and order quantities in supply chain management, not to the consequences of a hostile takeover. It is related to the variability in demand and the timing of reordering, not to actions by Al "Chainsaw" Dunlap.

Question 7

Price-break models deal with the fact that the selling price of an item varies with the order size.

Accepted Answer

Price-break models, also known as quantity discount models, take into account the fact that as the order size increases, the unit cost of production decreases, allowing for a lower selling price per unit. Therefore, there is a price break or discount when larger quantities are ordered.

Question 8

Some inventory situations involve placing orders to cover only one demand period or to cover short-lived items at frequent intervals.

Accepted Answer

This statement is true. In certain situations, inventory orders may be placed to cover only a specific demand period, such as stocking up for a holiday or seasonal sales. Additionally, for short-lived items such as perishable goods, frequent orders may be necessary to ensure the items are always in stock and fresh.

Question 9

Safety stock is not necessary in any fixed-time period system.

Accepted Answer

Safety stock is necessary in fixed-time period systems to account for variations in demand and lead time. Without safety stock, there is a risk of stockouts and disrupted operations.

Question 10

If demand for an item is normally distributed, we plan for demand to be twice the average demand and carry 2 standard deviations worth of safety stock inventory.

Accepted Answer

This statement is incomplete and incorrect. It's not enough to know that demand is normally distributed and twice the average - we need to know the standard deviation of demand as well to calculate safety stock inventory. Additionally, carrying 2 standard deviations worth of safety stock is not a one-size-fits-all solution and should be determined based on specific factors such as lead time and desired service level.

Question 11

Safety stock can be computed when using the fixed-order quantity inventory model by multiplying a z value representing the number of standard deviations to achieve a service level or probability by the standard deviation of periodic demand.

Accepted Answer

This statement is true. The formula for safety stock in the fixed-order quantity inventory model is SS = z * σ, where z is the number of standard deviations to achieve a desired service level or probability, and σ is the standard deviation of periodic demand.

Question 12

The key difference between a fixed-order quantity inventory model where demand is known and one where demand is uncertain is in computing the reorder point.

Accepted Answer

In a fixed-order quantity inventory model with known demand, the reorder point is simply the level of inventory at which a new order is placed. However, in a model with uncertain demand, the reorder point must take into account the variability of demand and the lead time for receiving a new order.

Question 13

In a price-break model of lot sizing, to find the lowest-cost order quantity, it is sometimes necessary to calculate the economic order quantity for each possible price.

Accepted Answer

In a price-break model, the lowest-cost order quantity may differ at each price breakpoint. Therefore, it is necessary to calculate the economic order quantity (EOQ) for each possible price to determine the optimal order quantity at each price level. This allows us to select the most cost-effective ordering strategy taking into account the price breaks offered by the supplier.

Question 14

In the fixed-time period model it is necessary to determine the inventory currently on hand to calculate the size of the order to place with a vendor.

Accepted Answer

In the fixed-time period model, the order is placed at fixed intervals regardless of inventory levels. Therefore, it is necessary to determine the inventory currently on hand to calculate the size of the order needed to replenish the inventory to a desired level.

Question 15

In a price-break model of lot sizing, to find the lowest-cost order quantity, it is sometimes necessary to calculate the economic order quantity for each possible price and to check to see whether the lowest cost quantity is feasible.

Accepted Answer

This statement is true as in a price-break model, there are multiple price options based on the order quantity, and finding the lowest cost quantity may require calculating the economic order quantity for each price level and comparing them to determine the most optimal order quantity.

Question 16

Price-break models deal with discrete or step changes in price as order size changes rather than a per-unit change.

Accepted Answer

Price-break models involve offering different prices for different quantities of products ordered, resulting in discrete or step changes in price as the order size changes, rather than a continuous per-unit change in price.

Question 17

Fixed-time period inventory models generate order quantities that vary from time period to time period, depending on the usage rate.

Accepted Answer

Fixed-time period inventory models have a set time interval for placing orders, but the order quantity can vary based on the usage rate during that time period.

Question 18

Cycle counting is a physical inventory-taking technique in which inventory is counted on a frequent basis rather than once or twice a year.

Accepted Answer

Cycle counting is a method of taking inventory counts on a frequent basis, often daily or weekly, rather than waiting until the end of the year. This helps ensure inventory accuracy and allows for prompt corrective action if discrepancies are found.

Question 19

Price-break models deal with the fact that the selling price of an item generally increases as the order size increases.

Accepted Answer

Price-break models actually deal with the fact that the selling price of an item generally decreases as the order size increases, offering discounts for bulk purchases.

Question 20

The "sawtooth effect" is named after the jagged shape of the graph of inventory levels over time.

Accepted Answer

The "sawtooth effect" is indeed named after the jagged shape of the graph of inventory levels over time, making statement A true.

Quiz 20: Inventory Management