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CHAPTER 16

INNOVATIVE INVENTORY AND


PRODUCTION MANAGEMENT TECHNIQUES
MULTIPLE CHOICE
1.

Which of the following is not an ordering cost?


a.
b.
c.
d.

cost of receiving inventory


cost of preparing the order
cost of the merchandise ordered
cost of storing the inventory

ANSWER:
2.

an ordering cost.
a carrying cost.
a purchasing cost.
a cost of not carrying goods in stock.

ANSWER:

EASY

A _____________ system of production control is paced by product demand.


a.
b.
c.
d.

EOQ
ABC
push
pull

ANSWER:
4.

EASY

The cost of receiving inventory is regarded as


a.
b.
c.
d.

3.

EASY

Which of the following statements is false concerning electronic data interchange?


a.
b.
c.
d.

Electronic data interchange (EDI) is essential in a pull system.


One of the benefits realized by EDI organizations is a faster processing of
transactions.
Electronic data interchange is essential in a push system.
Electronic data interchange refers to computer-to-computer exchange of
information.

ANSWER:

MEDIUM

161

162

5.

Chapter 16

_____________ is a pull system of production and inventory control.


a.
b.
c.
d.

EDI
EOQ
JIT
ABC

ANSWER:
6.

EASY

Reducing setup time is a major aspect of


a.
b.
c.
d.

all push inventory systems.


the determination of safety stock quantities.
a JIT system.
an EOQ system.

ANSWER:

EASY

Reducing inventory to the lowest possible levels is a major focus of


a.
b.
c.
d.

JIT.
push inventory systems.
EOQ.
ABC.

ANSWER:
9.

EASY

a companys vendors.
employees.
inspection of finished goods inventory.
a good product warranty.

ANSWER:

8.

In a JIT system, the quality of each product begins with


a.
b.
c.
d.

7.

Innovative Inventory and Production Management Techniques

EASY

JIT is a philosophy concerned with


a.
b.
c.
d.

when to do something.
how to do something.
where to do something.
how much of something should be done.

ANSWER:

EASY

Chapter 16

10.

Innovative Inventory and Production Management Techniques

When JIT is implemented, which of the following changes in the accounting system would
not be expected?
a.
b.
c.
d.

fewer cost allocations


elimination of standard costs
combining labor and overhead into one product cost category
combing raw material and materials in work-in-process into one product cost
category

ANSWER:
11.

MEDIUM

EOQ systems.
push systems in general.
JIT.
pull systems in general.

ANSWER:

EASY

Just-in-time (JIT) inventory systems


a.
b.
c.
d.

result in a greater number of suppliers for each production process.


focus on a push type of production system.
can only be used with automated production processes.
result in inventories being either greatly reduced or eliminated.

ANSWER:
13.

Striving for flexibility in the number of products that can be produced in a short period of
time is characteristic of
a.
b.
c.
d.

12.

163

EASY

The JIT philosophy does not focus on


a.
b.
c.
d.

standardizing parts used in products.


eliminating waste in the production process.
finding the absolute lowest price for purchased parts.
improving quality of output.

ANSWER:

EASY

164

14.

Chapter 16

In a JIT manufacturing environment, product costing information is least important for


use in
a.
b.
c.
d.

work in process inventory valuation.


pricing decisions.
product profitability analysis.
make-or-buy decisions.

ANSWER:
15.

MEDIUM

cost of specific-purpose equipment


cost of equipment maintenance
property taxes on the plant
salary of a manufacturing cell worker

ANSWER:

EASY

With JIT manufacturing, which of the following costs would be considered a direct
product cost?
a.
b.
c.
d.

insurance on the plant


repair parts for machinery
janitors salaries
salary of the plant supervisor

ANSWER:
17.

With JIT manufacturing, which of the following costs would be considered an indirect
product cost?
a.
b.
c.
d.

16.

Innovative Inventory and Production Management Techniques

MEDIUM

Which of the following statements is not true?


a.
b.
c.
d.

JIT manufacturing strives for zero inventories.


JIT manufacturing strives for zero defects.
JIT manufacturing uses manufacturing cells.
JIT manufacturing utilizes long lead time and few deliveries.

ANSWER:

EASY

Chapter 16

18.

Innovative Inventory and Production Management Techniques

The JIT environment has caused a reassessment of product costing techniques. Which of
the following statements is true with respect to this reassessment?
a.
b.
c.
d.

Traditional cost allocations based on direct labor are being questioned and
criticized.
The federal government, through the SEC, is responsible for the reassessment.
The reassessment is caused by the replacement of machine hours with labor hours.
None of the above is true.

ANSWER:
19.

b.
c.
d.

MEDIUM

employees are retrained on different equipment, but the plant layout generally
remains unchanged.
new machinery and equipment must be purchased from franchised JIT dealers.
machinery and equipment are moved into small autonomous production lines
called islands or cells.
new, more efficient machinery and equipment are purchased and installed in the
original plant layout.

ANSWER:

MEDIUM

Which of the following describes the effect on direct labor when management adopts the
JIT philosophy?
a.
b.
c.
d.

Each direct labor person performs a single task, thereby allowing that person to
reach his or her theoretical potential.
Because each person runs a single machine in a JIT environment, there are more
employees classified as direct labor.
The environment becomes more labor-intensive.
Machine operators are expected to run several different types of machines, help set
up for production runs, and identify and repair machinery needing maintenance.

ANSWER:
21.

When a firm adopts the just-in-time method of management,


a.

20.

165

MEDIUM

JIT concepts
a.
b.
c.
d.

can be effectively implemented in organizations that are only partially automated.


are only appropriate for use with CIM systems.
involve shifting from a capital-intensive to a labor-intensive process.
require full computerization of the JIT manufacturing process.

ANSWER:

EASY

166

22.

Chapter 16

According to JIT philosophy,


a.
b.
c.
d.

inventories of finished goods always should be available to meet customer demand.


push-through manufacturing flows are the most efficient.
maintaining inventories wastes resources and frequently covers up poor work or
other problems.
long production runs and large production lot sizes take advantage of economies
of scale.

ANSWER:
23.

MEDIUM

uses a job order costing system.


classifies processing costs as raw (or direct) material, direct labor, and overhead.
is more complex than in other types of manufacturing environments.
follows process costing procedures whereby costs are accumulated by the process
(cell) and attached to units processed for the period.

ANSWER:

MEDIUM

An implication of the demand-pull nature of the JIT production process is that


a.
b.
c.
d.

finished goods inventories must be available to meet customer demand, although


raw material is delivered on an as-needed basis.
more storage space for inventories is necessary.
finished products are packaged and shipped to customers immediately, thus
requiring minimal finished goods inventories.
problem areas become less visible as inventories are reduced.

ANSWER:
25.

Accounting for product costs in a JIT environment


a.
b.
c.
d.

24.

Innovative Inventory and Production Management Techniques

MEDIUM

In accounting for JIT operations, the Raw Material Inventory account


a.
b.
c.
d.

is closely monitored to ensure that materials are always on hand in time.


can be expected to have a larger balance than with traditional manufacturing
methods.
is combined with the Work In Process Inventory account.
is combined with the Finished Goods Inventory account.

ANSWER:

EASY

Chapter 16

26.

Innovative Inventory and Production Management Techniques

A kanban plays an important role in


a.
b.
c.
d.

JIT.
EOQ.
ABC.
CPM.

ANSWER:
27.

EASY

Focused factory arrangements


Economic order quantity
Multiprocess handling
Activity-based management

ANSWER:

MEDIUM

The term cell is used to describe


a.
b.
c.
d.

a grouping of one or more automated machines within a company.


a storage bin for C type inventory in an ABC inventory system.
files in a CAD/CAM system.
a factorys area of conversion activity.

ANSWER:
29.

____________________ may involve relocation or plant modernization by a vendor.


a.
b.
c.
d.

28.

167

EASY

In a production cell,
a.
b.
c.
d.

an individual worker may be expected to operate several different machines, do


setups, and perform preventive maintenance on the equipment.
each worker becomes an expert in the operation of a single piece of equipment.
machines are arranged so that similar machines are grouped together.
clear separation is maintained between those workers who operate the machinery
and those workers who set up and maintain the machinery.

ANSWER:

MEDIUM

168

30.

Chapter 16

U-shaped groupings of workers and machines that improve materials handling and flow
are known as
a.
b.
c.
d.

manufacturing cells.
efficiency stations.
multi-flow modules.
productivity islands.

ANSWER:
31.

EASY

More flexibility
no
no
yes
yes

ANSWER:

Less process involvement


no
yes
yes
no

EASY

The process of _________ occurs when equipment is programmed to stop when a certain
situation arises.
a.
b.
c.
d.

throughput
automation
backflushing
information sharing

ANSWER:
33.

For workers in a multiprocess handling situation, which of the following happens?


a.
b.
c.
d.

32.

Innovative Inventory and Production Management Techniques

EASY

The connection of two or more flexible manufacturing systems via a host computer and a
networking information system is known as

a.
b.
c.
d.

computer integrated
manufacturing
yes
yes
no
no

ANSWER:

EASY

electronic data
interchange
yes
no
no
yes

Chapter 16

34.

Innovative Inventory and Production Management Techniques

A key element of Japans success in world markets is


a.
b.
c.
d.

the elimination of waste in all operations.


automation of the billing function.
inefficient labor forces in competing countries.
the verification procedures incorporated into computer programs.

ANSWER:
35.

Standard costs
yes
no
yes
no

ANSWER:

Minimal variances from standards


no
no
yes
yes
EASY

Which of the following areas offers an opportunity to eliminate waste?


a.
b.
c.
d.

raw material and labor


space and production time
recordkeeping and working capital
all of the above

ANSWER:
37.

EASY

Backflush costing is concerned with which of the following?


a.
b.
c.
d.

36.

EASY

Flexible manufacturing systems are


a.
b.
c.
d.

designed to provide more flexibility in a firms manufacturing process by using


computer-aided machinery.
the same as computer-aided design systems.
commonly used by firms that need to make large quantities of one product.
are very complicated and cause increased defect rates in output.

ANSWER:

EASY

169

1610

38.

Chapter 16

Kaizen means
a.
b.
c.
d.

doing it the Japanese way.


continuous improvement.
employee empowerment.
implementation of a centralized organizational structure.

ANSWER:
39.

EASY

The peak level of unit sales will occur in which stage of the product life cycle?
a.
b.
c.
d.

growth
maturity
decline
introduction

ANSWER:

EASY

For product life cycle costing, R&D costs are


a.
b.
c.
d.

expensed as incurred.
capitalized and allocated over the life cycle.
deducted as period costs.
charged to specific departments as incurred.

ANSWER:
42.

EASY

target costing.
product life cycle costing.
activity-based costing.
responsibility costing.

ANSWER:

41.

The process that determines an allowable product cost while setting market price and
allowing for an acceptable profit margin is known as
a.
b.
c.
d.

40.

Innovative Inventory and Production Management Techniques

EASY

An important focus in product life cycle costing is


a.
b.
c.
d.

the activity base.


the target cost.
the cost driver.
variable costs.

ANSWER:

EASY

Chapter 16

43.

Innovative Inventory and Production Management Techniques

Projected sales price minus a reasonable profit equals


a.
b.
c.
d.

the standard cost.


contribution margin.
projected Cost of Goods Sold.
target cost.

ANSWER:
44.

EASY

30%
50%
70%
90%

ANSWER:

EASY

Which of the following fluctuate over the product life cycle?


a.
b.
c.
d.

sales price per unit


the types of costs that are incurred
product profitability
all of the above

ANSWER:
46.

Approximately what percentage of future product costs is determined in the development


stage of the product life cycle?
a.
b.
c.
d.

45.

1611

EASY

In which of the following stages of the product life cycle would operating losses not be
expected?
a.
b.
c.
d.

growth
development
introduction
decline

ANSWER:

EASY

1612

47.

Chapter 16

During which stage of the product life cycle will a company witness the highest profit?
a.
b.
c.
d.

development
maturity
growth
decline

ANSWER:
48.

EASY

design specifications
manufacturing processes
impact on product costs when different inputs resources are used
all of the above

ANSWER:

EASY

Ongoing efforts to reduce costs, increase product quality, and/or improve production
process once manufacturing has begun is known as
a.
b.
c.
d.

cost management.
kaizen costing.
target costing.
life-cycle costing.

ANSWER:
50.

Cost tables are databases that provide information on which of the following?
a.
b.
c.
d.

49.

Innovative Inventory and Production Management Techniques

EASY

Kaizen costing is used for which of the following types of products?


a.
b.
c.
d.

New products
yes
no
no
yes

ANSWER:

Existing products
yes
yes
no
no
EASY

Chapter 16

51.

Innovative Inventory and Production Management Techniques

A mandate to reduce costs, increase product quality, and/or improve production processes
through continuous improvement is known as
a.
b.
c.
d.

kaizen costing.
activity-based costing.
the theory of constraints.
mass customization.

ANSWER:
52.

EASY

the cost of special orders.


the level of activities that are non-value-added.
product variety.
period costs.

ANSWER:

EASY

The projected sales price for a new product (which is still in the development stage of the
product life cycle) is $50. The company has estimated the life-cycle cost to be $30 and the
first-year cost to be $60. On this type of product, the company requires a $12 per unit
profit. What is the target cost of the new product?
a.
b.
c.
d.

$60
$30
$38
$42

ANSWER:
54.

If life-cycle costs exceed the target cost of a product, managers will strive to reduce
a.
b.
c.
d.

53.

1613

EASY

The theory of constraints can


a.
b.
c.
d.

identify what limitations exist with raw material suppliers.


follows a methodology similar to linear programming.
be ignored since it assumes too many estimates in the production cycle.
show where bottlenecks exist and sets the limit of output to these bottlenecks.

ANSWER:

EASY

1614

55.

Chapter 16

Placing quality inspection points ahead of bottlenecks will reduce


a.
b.
c.
d.

product flow.
the number of defective products.
the influence of constraints on production flow.
the critical path time.

ANSWER:
56.

MEDIUM

precede bottlenecks.
follow bottlenecks.
be placed at the end of all production processes.
be placed at random points in the manufacturing process.

ANSWER:

EASY

The flow of goods through a production process cannot be at a faster rate than the slowest
bottleneck is the definition for
a.
b.
c.
d.

mass customization.
business process reengineering.
the theory of constraints.
the Pareto principle.

ANSWER:
58.

Quality inspection points should


a.
b.
c.
d.

57.

Innovative Inventory and Production Management Techniques

EASY

Bottlenecks are
a.
b.
c.
d.

machine constraints in the production line.


machine constraints that restrict the production cycle so idle time at other
processes occurs.
useful for identifying any production spot slowdown.
restrictions on raw material sources but not the quantity of output.

ANSWER:

EASY

Chapter 16

59.

Innovative Inventory and Production Management Techniques

In analyzing production flow, a bottleneck is


a.
b.
c.
d.

an intermediate inventory.
always off the critical path.
a capacity constraint.
related to a non-value-adding activity.

ANSWER:
60.

EASY

Period-by-period basis
yes
yes
no
no

ANSWER:

Life-cycle basis
yes
no
yes
no

EASY

Which approaches to costing should be associated with each of the following life-cycle
stages?
a.
b.
c.
d.

Development
Kaizen
Target
Target
Kaizen

ANSWER:
62.

Product profit margins are typically judged on a


a.
b.
c.
d.

61.

1615

Introduction
Target
Standard
Kaizen
Standard

Maturity
Standard
Kaizen
Standard
Target

MEDIUM

In the introduction stage of a product's life-cycle, which of the following type of costs
typically may create losses rather than profits?
a.
b.
c.
d.

advertising
assembly
design
overhead

ANSWER:

MEDIUM

1616

63.

Chapter 16

Most studies have indicated that what percent of a product's total life-cycle costs are
determined in the development/design stage?
a.
b.
c.
d.

60%70%
70%80%
80%90%
90%95%

ANSWER:
64.

EASY

kaizen costing
target costing
standard costing
process costing

ANSWER:

MEDIUM

Which of the following formulas is the best representation of the concept of target
costing?
a.
b.
c.
d.

target cost + profit margin = selling price


selling price target cost = profit margin
selling price profit margin = target cost
target cost standard cost = profit margin

ANSWER:
66.

Which of the following costing methods is the most effective in controlling a product's
total life-cycle cost?
a.
b.
c.
d.

65.

Innovative Inventory and Production Management Techniques

EASY

Successful product development should include


a.
b.
c.
d.

kaizen costing.
value engineering.
kanban implementation.
all of the above.

ANSWER:

MEDIUM

Chapter 16

67.

Innovative Inventory and Production Management Techniques

Value engineering seeks to obtain increased


a.
b.
c.
d.

product life-cycle and reduced direct labor inputs.


planning team membership and reduced time-to-market.
product performance ratio and reduced substitute goods.
product functionality and reduced costs.

ANSWER:
68.

DIFFICULT

can be applied to services if they are sufficiently uniform.


can be applied to services only if they are automated.
can be applied to services that are performed in a manufacturing environment.
cannot be applied to services.

ANSWER:

MEDIUM

Kaizen costing helps to


a.
b.
c.
d.

reduce product costs of products in the design and development stage.


keep the target cost as the primary focus after a product enters production.
keep profit margin relatively stable as product price declines over the product life
cycle.
reduce the cost of engineering change orders during each stage of the product life
cycle.

ANSWER:
70.

Target costing
a.
b.
c.
d.

69.

1617

DIFFICULT

In which life-cycle stage are product quality improvements and stable selling prices likely
to occur?
a.
b.
c.
d.

introduction
growth
maturity
decline

ANSWER:

MEDIUM

1618

71.

Chapter 16

From a cost management view, research and development cost represents


a.
b.
c.
d.

a life-cycle investment
a period expense.
an unearned revenue.
a risk reserve.

ANSWER:
72.

Computers
yes
no
yes
yes

ANSWER:

MEDIUM

Furniture
yes
yes
no
no

Textbooks
yes
yes
no
yes

Automobiles
yes
no
yes
yes

MEDIUM

Kanban is the Japanese word for


a.
b.
c.
d.

production.
just-in-time.
card.
target costing.

ANSWER:
74.

Life-cycle costing is especially important in which of the following types of companies?


a.
b.
c.
d.

73.

Innovative Inventory and Production Management Techniques

EASY

JIT seeks to
a.
b.
c.
d.

reduce production cost while increasing quality.


radically redesign the production process for effectiveness.
modify all non-value-added activities.
all of the above.

ANSWER:

DIFFICULT

Chapter 16

75.

Innovative Inventory and Production Management Techniques

The JIT philosophy indicates that inventory, as well as which of the following, should be
eliminated?

a.
b.
c.
d.

Suppliers
yes
yes
no
no

ANSWER:
76.

Employees
yes
no
yes
no

MEDIUM

variable overhead allocation methodologies.


fixed overhead allocation methodologies.
variable and fixed overhead allocation methodologies.
the financial accounting requirement to expense research and development as
incurred.

ANSWER:

MEDIUM

Goods will flow through a production process at the rate of the


a.
b.
c.
d.

slowest part of the process.


fastest part of the process.
average of all the parts of the process.
time standards set using externally calibrated benchmarks.

ANSWER:
78.

Storage
yes
yes
no
yes

Business-ValueAdded Activities
yes
no
no
yes

Companies have often produced significant amounts of unwanted inventory because of


a.
b.
c.
d.

77.

1619

MEDIUM

A machine constraint creates


a.
b.
c.
d.

an autonomation.
a bottleneck.
a push inventory system.
the need for third-party logistics.

ANSWER:

EASY

1620

79.

Chapter 16

In a production process with a machine constraint, if a quality control point is to be


established, it should be set up
a.
b.
c.
d.

within the machine's processes.


directly after the machine has performed its functions.
immediately before the machine.
at the end of the production process.

ANSWER:
80.

Innovative Inventory and Production Management Techniques

EASY

Managing constraints is a process of


a.
b.
c.
d.

backflush costing.
design for manufacturability.
just-in-time redesign.
continuous improvement.

ANSWER:

MEDIUM

THE FOLLOWING MULTIPLE CHOICE RELATE TO MATERIAL COVERED IN THE


APPENDIX OF THE CHAPTER.
81.

(Appendix) The Whitehead Co. produces quality jewelry items for various retailers. For
the coming year, it has estimated it will consume 500 ounces of gold. Its carrying costs for
a year are $2 per ounce. No safety stock is maintained. If the EOQ is 100 ounces, what is
the cost per order?
a.
b.
c.
d.

$40
$20
$5
$25

ANSWER:
82.

MEDIUM

(Appendix) The Whitehead Co. produces quality jewelry items for various retailers. For
the coming year, it has estimated it will consume 500 ounces of gold. Its carrying costs for
a year are $2 per ounce. No safety stock is maintained. If the EOQ is 100 ounces, what
would be the estimate for Whiteheads total carrying costs for the coming year?
a.
b.
c.
d.

$200
$250
$100
$1,000

ANSWER:

MEDIUM

Chapter 16

83.

Innovative Inventory and Production Management Techniques

(Appendix) A firm estimates that its annual carrying cost for material X is $.30 per lb. If
the firm requires 50,000 lbs. per year, and ordering costs are $100 per order, what is the
EOQ (rounded to the nearest pound)?
a.
b.
c.
d.

5,774 lbs.
4,082 lbs.
1,732 lbs.
1,225 lbs.

ANSWER:
84.

MEDIUM

(Appendix) Z Corp.s EOQ for Material A is 500 units. This EOQ is based on:
Annual demand
Ordering costs

5,000 units
$12.50

What is the annual carrying cost per unit for Material A?


a.
b.
c.
d.

$0.50
$2.00
$2.50
$5.00

ANSWER:
85.

1621

MEDIUM

(Appendix) Z Corp.s EOQ for Material A is 500 units. This EOQ is based on:
Annual demand
Ordering costs

5,000 units
$12.50

What are Z Corp.s total annual ordering costs for Material A?


a.
b.
c.
d.

$6,000
$600
$125
$1,000

ANSWER:

MEDIUM

1622

86.

Chapter 16

(Appendix) Clear View Co. manufactures various glass products including a car window.
The setup cost to produce the car window is $1,200. The cost to carry a window in
inventory is $3 per year. Annual demand for the car window is 12,000 units. What is the
most economical production run (rounded to the nearest unit)?
a.
b.
c.
d.

6,000 units
3,000 units
9,295 units
3,098 units

ANSWER:
87.

MEDIUM

(Appendix) Clear View Co. manufactures various glass products including a car window.
The setup cost to produce the car window is $1,200. The cost to carry a window in
inventory is $3 per year. Annual demand for the car window is 12,000 units. If the annual
demand for the car window was to increase to 15,000 units,
a.
b.
c.
d.

the number of setups would decrease.


the total carrying costs would increase.
the economic order quantity would decline.
all of the above would occur.

ANSWER:
88.

Innovative Inventory and Production Management Techniques

EASY

(Appendix) A company has estimated its economic order quantity for Part A at 2,400 units
for the coming year. If ordering costs are $200 and carrying costs are $.50 per unit per
year, what is the estimated total annual usage?
a.
b.
c.
d.

6,000 units
28,800 units
7,200 units
2,400 units

ANSWER:

MEDIUM

Chapter 16

89.

Innovative Inventory and Production Management Techniques

(Appendix) A company annually consumes 10,000 units of Part C. The carrying cost of
this part is $2 per year and the ordering costs are $100. The company uses an order
quantity of 500 units. By how much could the company reduce its total costs if it
purchased the economic order quantity instead of 500 units?
a.
b.
c.
d.

$500
$2,000
$2,500
$0

ANSWER:
90.

MEDIUM

250 units
1,000 units
500 units
2,000 units

ANSWER:

MEDIUM

(Appendix) Which of the following tells management when to order?


a.
b.
c.
d.

safety stock level


order point
the economic order quantity
the Pareto inventory analysis

ANSWER:
92.

(Appendix) A company annually consumes 10,000 units of Part C. The carrying cost of
this part is $2 per year and the ordering costs are $100. The company uses an order
quantity of 500 units. If the company operates 200 days per year, and the lead time for
ordering Part C is 5 days, what is the order point?
a.
b.
c.
d.

91.

1623

EASY

(Appendix) Which of the following affects the order point?


a.
b.
c.
d.

daily usage
lead time
safety stock
all of the above

ANSWER:

EASY

1624

93.

Chapter 16

(Appendix) A decrease in the lead time would reduce the


a.
b.
c.
d.

order point.
safety stock.
economic order quantity.
ordering costs.

ANSWER:
94.

EASY

(Appendix) If no safety stock is carried, the average inventory is equal to the


a.
b.
c.
d.

order point/2.
order point 2.
economic order quantity/2.
economic order quantity 2.

ANSWER:

EASY

(Appendix) The role of safety stock in an organization is to


a.
b.
c.
d.

reduce the lead time for an order to be received.


reduce the probability of a stockout.
reduce the order point.
decrease the economic order quantity.

ANSWER:
97.

EASY

cost of a stockout.
probability of a stockout.
carrying cost of stock.
economic order quantity.

ANSWER:

96.

(Appendix) The size of the safety stock is directly affected by all of the following, except
the
a.
b.
c.
d.

95.

Innovative Inventory and Production Management Techniques

EASY

(Appendix) The optimal size of the safety stock is defined by the point where the
a.
b.
c.
d.

costs of carrying the safety stock equal stockout costs.


setup costs equal stockout costs.
ordering costs equal stockout costs.
reorder point equals safety stock.

ANSWER:

MEDIUM

Chapter 16

98.

Innovative Inventory and Production Management Techniques

(Appendix) If a company carries safety stock and its annual carrying costs per unit are
$0.30, what formula yields the total annual carrying costs?
a.
b.
c.
d.

$0.30 [(EOQ/2) + Safety stock)]


$0.30 (EOQ + Safety stock)
$0.30 [(EOQ 2) + Safety stock)]
$0.30 (EOQ Safety stock)

ANSWER:
99.

EASY

10,000 gallons
38,000 gallons
48,000 gallons
58,000 gallons

ANSWER:

MEDIUM

(Appendix) Blanchard Corp. operates its factory 300 days per year. Its annual
consumption of Material Y is 1,200,000 gallons. It carries a 10,000 gallon safety stock of
Material Y and its lead time is 12 business days. If the EOQ for Material Y is 30,000
gallons, and the carrying cost per gallon per year is $.25, what is the total annual carrying
cost for Material Y?
a.
b.
c.
d.

$3,750
$7,500
$6,250
$10,000

ANSWER:
101.

(Appendix) Blanchard Corp. operates its factory 300 days per year. Its annual
consumption of Material Y is 1,200,000 gallons. It carries a 10,000 gallon safety stock of
Material Y and its lead time is 12 business days. What is the order point for Material Y?
a.
b.
c.
d.

100.

1625

MEDIUM

(Appendix) Blanchard Corp. consumes 1,200,000 gallons of Material Y per year. Its order
quantity is 30,000 gallons. It maintains a safety stock of 10,000 gallons and its annual
carrying costs are $0.25 per gallon per year. If the ordering cost is $20 per order, what are
the total annual ordering costs?
a.
b.
c.
d.

$600
$800
$8,300
$1,200

ANSWER:

MEDIUM

1626

102.

Chapter 16

(Appendix) R Corp.s order quantity for Material T is 5,000 lbs. If the company maintains
a safety stock of T at 500 lbs., and its order point is 1,500 lbs., what is the lead time
assuming daily usage is 50 lbs.?
a.
b.
c.
d.

30 days
100 days
10 days
20 days

ANSWER:
103.

MEDIUM

$1,000
$600
$100
$1,100

ANSWER:

MEDIUM

(Appendix) For Raw Material B, a company maintains a safety stock of 5,000 pounds. Its
average inventory (taking into account the safety stock) is 8,000 pounds. What is the
apparent order quantity?
a.
b.
c.
d.

16,000 lbs.
6,000 lbs.
10,000 lbs.
21,000 lbs.

ANSWER:
105.

(Appendix) R Corp.s order quantity for Material T is 5,000 lbs. If the company maintains
a safety stock of T at 500 lbs., and its order point is 1,500 lbs., what would be the total
annual carrying costs assuming the carrying cost per unit is $0.20?
a.
b.
c.
d.

104.

Innovative Inventory and Production Management Techniques

MEDIUM

(Appendix) In an ABC inventory analysis, the items that are most likely to be controlled
with a red-line system are the
a.
b.
c.
d.

A items.
B items.
C items.
items on a perpetual inventory.

ANSWER:

EASY

Chapter 16

106.

Innovative Inventory and Production Management Techniques

(Appendix) Which of the following might be appropriate for items in the C category of
an ABC inventory analysis?
a.
b.
c.
d.

a red-line system
a two-bin system
a periodic inventory system
all of the above

ANSWER:
107.

MEDIUM

(Appendix) All other factors equal, a decrease in the order quantity will
a.
b.
c.
d.

decrease the annual carrying costs.


decrease the annual ordering costs.
increase the lead time.
reduce the safety stock.

ANSWER:

EASY

(Appendix) The economic order quantity is not affected by the


a.
b.
c.
d.

estimate of the annual material consumption.


cost of insuring a unit of inventory for a year.
cost of purchase-order forms.
safety stock level.

ANSWER:
110.

MEDIUM

companys weighted average cost of capital


cost of purchase requisition forms
cost of insuring inventory
cost of a stockout

ANSWER:

109.

(Appendix) The __________________ would not affect the economic order quantity.
a.
b.
c.
d.

108.

1627

EASY

(Appendix) A decrease in the price of a raw material could result in a(n)


a.
b.
c.
d.

increase in the lead time.


increase in the EOQ.
decrease in the order point.
increase in the setup costs.

ANSWER:

MEDIUM

1628

111.

Chapter 16

(Appendix) The number of orders that will be submitted each year for raw material is
given by which formula?
a.
b.
c.
d.

Economic order quantity order point


Total annual material needs/economic order quantity
Order point/economic order quantity
Total annual material needs/safety stock

ANSWER:
112.

Innovative Inventory and Production Management Techniques

EASY

(Appendix) The economic production run quantity directly affects the


a.
b.
c.
d.

order point for raw material inventories.


safety stock for finished goods inventory.
level of finished goods inventory.
lead time for producing finished goods inventory.

ANSWER:

MEDIUM

SHORT ANSWER/PROBLEMS
1.

Why may a JIT control system be useful in disclosing a firms inefficiencies and problems?
ANSWER:
The JIT control system is based on a philosophy that inventory is
undesirable. Subscribers to the JIT philosophy believe inventory reductions expose
organizational problems and inefficiencies. These problems and inefficiencies may not be
brought to managements attention if inventories are not pushed to lower and lower levels.
They would remain hidden and undetectable at higher levels of inventory.
MEDIUM

2.

(Appendix) What is the purpose of the EOQ model?


ANSWER:
The purpose of the EOQ model is to identify the least cost quantity of a
material to be purchased at each order point. The model explicitly considers the carrying
and ordering costs and identifies the purchase quantity that minimizes the total of these
costs.
MEDIUM

Chapter 16

3.

Innovative Inventory and Production Management Techniques

1629

Why does a push based inventory control system generate larger inventory levels than a
pull system?
ANSWER:
Larger levels of inventory exist by design in push production control
systems. The inventory buffers permit lower levels of communication between business
segments, permit longer production runs, and protect the firm from environmental
uncertainties and unforeseen interruptions in production or supplies.
MEDIUM

4.

What does the term pull mean in the context of production control?
ANSWER:
Pull simply refers to the fact that the pace and level of production are
geared to product demand. Each work center sets the pace for the next upstream work
center. Customer demand paces the final downstream work center.
MEDIUM

5.

Why might it be necessary to make adjustments to the accounting system in a firm that
adopts JIT?
ANSWER:
JIT production control systems foster automation and reduced levels of
inventory. Consequently, raw material inventories and direct labor costs may be too small
to warrant separate cost poolsthey can be combined with other cost pools.
Additional adjustments may be necessary to accommodate standard costs, which are
constantly adjusted to reflect the latest technological changes in production methods. Also,
more costs could be traced to specific products and fewer costs would have to be
allocated.
MEDIUM

6.

What is the relationship between warehouse space and the length of production runs?
ANSWER: Longer production runs increase the levels of specific inventories. To
accommodate long production runs, significant warehouse space needs to be available for
storing intermediate and final products.
MEDIUM

1630

7.

Chapter 16

Innovative Inventory and Production Management Techniques

Why is it important for a company to be (geographically) close to its suppliers to


implement a JIT inventory control system?
ANSWER:
The geographical proximity is important to minimize shipping and handling
costs of supplies and materials. Geographical proximity also facilitates frequent
communication and joint planning between a supplier and customer.
MEDIUM

8.

Bell Company estimates that it will consume 400,000 units of Part A in the coming year.
The ordering cost for this unit is $3.20. What would be the carrying costs per unit if the
EOQ model indicates that it is optimal to place exactly 50 orders for the upcoming year?
ANSWER:
If projected usage for the year is 400,000 units, the EOQ would be 8,000
units (400,000/50). To determine the carrying costs per unit, the following equation is
solved:
8,000 = [( 2 400,000 $3.20 / CC] , where CC is the carrying cost per unit.
Solving the equation, CC = $0.04 per unit.
MEDIUM

9.

Bell Company estimates that it will consume 400,000 units of Part A in the coming year.
The ordering cost for this unit is $3.20. Bell Company wants to maintain a safety stock of
1,000 units, and its factory operates 200 days per year. What is the order point if the lead
time is 2 days?
ANSWER:
The order point = (daily usage lead time) + safety stock daily usage =
400,000/200 = 2,000; lead time = 2 days, safety stock = 1,000
Order point = (2,000 2) + 1,000 = 5,000 units
MEDIUM

10.

How does adopting a JIT system affect the firms relationship with suppliers and how must
suppliers change their way of doing business?

Chapter 16

Innovative Inventory and Production Management Techniques

1631

ANSWER:
The JIT manufacturer will limit the number of suppliers to a few. Longterm contracts are entered into with suppliers. Suppliers raw material must be top quality
with no defects.
Small quantities of raw material are delivered frequently and little or no raw material is
maintained by the buyer.
Suppliers must be located close enough to the JIT buyer to deliver small quantities very
quickly. The supplier must agree to providing a top-quality product to its JIT customer.
MEDIUM
11.

Identify and discuss how sales and costs are affected during the five stages of the product
life cycle.
ANSWER:
The five stages of the product life cycle are (1) development, (2) introduction, (3) growth, (4) maturity, and (5) decline. In the development stage, no
production costs or sales exist, but R & D costs are extremely high. During the
introduction stage low unit sales exist while high advertising costs are evident. The growth
stage sees increasing unit sales and decreasing production costs per unit. The maturity
stage witnesses peak unit sales and a stabilization of production costs per unit. During the
decline stage unit sales decrease while production costs per unit increase.
MEDIUM

12.

Discuss differences in approach and potential usage between target and kaizen costing.
ANSWER:
Target costing is considered a procedural approach that is used to
determine a maximum allowable cost for a product, while kaizen costing is a mandate to
reduce costs, increase product quality, and/or improve production process through
continuous improvement. Target costing has a large potential for cost reduction in lifelong product cost because these costs are embedded in the product during design and
development. Kaizen costing has limited potential in cost reduction of existing products,
but may be useful in target costing in the future.
MEDIUM