Chapter 6 Inventory Control Models

1) Inventory is such an expensive asset
that it may account for as much as 50 percent of a firm’s invested capital.

2) The same ratio of marginal loss to the
sum of marginal loss and marginal profit is used to solve one-period inventory
models for both discrete and continuous probability distributions.

3) In the decoupling function, some
inventory may be stored between each production process to act as a buffer.

4) Service level is the chance, measured
in percent, that there will be a stockout.

5) A stockout is a situation that occurs
when there is no inventory on hand.

6) The concept of inventory is applicable
to both manufacturing and service organizations.

7) One reason inventory is required is the
uneven flow of resources through a company.

8) Inventory is any stored resource that
is used to satisfy a current or future need.

9) Economic order quantity (EOQ) analysis
has recently become practical as a consequence of high-speed computers.
10) Inventory is the common thread that
ties all the functions and departments of the organization together.

11) The purpose of the EOQ model is to
achieve a balance between the cost of holding inventory and the cost of
stockouts.

12) Under the assumptions made to develop
the EOQ model, average inventory is one-half of the maximum inventory.
13) The EOQ model is relatively
insensitive to minor violations of the basic assumptions.

14) The production run model is useful
when a firm purchases inventory that is delivered over a period of time.

15) The two fundamental decisions that you
have to make when controlling inventory are: (1) how much to order, and (2) how
much money to spend.
16) The economic order quantity helps one
estimate the optimal number of units to purchase with each order.

17) An increase in holding cost will
increase the economic order quantity, holding all other factors constant.

18) An increase in ordering cost will
increase the economic order quantity, holding all other factors constant.
19) The reorder point occurs during a
stockout.
20) Safety stock is ignored when computing
the reorder point.
21) In a quantity discount model, the
purchase cost or material cost must be included in the total cost calculation.

22) Theft is one of the “ordering
cost factors.”

23) Purchasing department supplies
comprise one of the “carrying cost factors.”

24) We can usually determine an
appropriate safety stock even if we are unable to accurately assess the actual
cost of a stockout.

25) One of the assumptions of the basic
EOQ model is that the receipt of inventory is instantaneous.

26) ABC analysis places inventory into 26
categories for computer analysis.

27) In ABC inventory analysis, items in
the “A” group should have the lowest dollar value to the firm.
28) The costs involved in a typical
inventory model are order costs, management costs, and holding costs.

29) ERP systems are expensive to buy and
costly to customize.

30) In the optimal decision rule using marginal
analysis for the single period model, we will stock an additional unit as long
as the probability of selling one or less unit is less than the ratio ML/(ML +
MP) where ML is marginal loss and MP is marginal profit.