When the economic order quantity (EOQ) model is used for a firm that manufactures its inventory, ordering costs consist primarily of
Answer (D) is correct. A manufacturer can use the EOQ model by substituting production set-up costs for ordering costs. Set-up costs are the manufacturer’s equivalent of ordering costs. The result is sometimes referred to as the economic batch quantity.
An inventory management technique designed to minimize inventory investment by having materials arrive at the time they are needed for use is known as
Answer (D) is correct. A just-in-time (JIT) inventory management system limits the output of each manufacturing operation to the demand of the next operation. Shipment of raw materials from vendors are scheduled to arrive “just in time” to be used in the production process. Inventory storage is considered a nonvalue-adding activity, and raw materials on hand are thus kept to a minimum.
All of the following are carrying costs of inventory except
Answer (C) is correct. The cost of shipping inventory is a cost of acquiring, not carrying, it.
Valley, Inc., uses 400 lbs. of a rare isotope per year. The isotope costs $500 per lb., but the supplier is offering a quantity discount of 2% for order sizes between 30 and 79 lbs. and a 6% discount for order sizes of 80 lbs. or more. The ordering costs are $200. Carrying costs are $100 per lb. of material and are not affected by the discounts. If the purchasing manager places eight orders of 50 lbs. each, the total cost of ordering and carrying inventory, including discounts lost, will be
Answer (D) is correct. Valley’s annual ordering costs are $1,600 ($200 per order × 8 orders per year , and the annual carrying costs are $2,500 ($100 per pound × 25 pounds average inventory). Gross annual product purchase cost is $200,000 ($500 per pound × 400 pounds annual usage). Because the differential discount lost is 4% (6% – 2%), annual discounts lost equal $8,000 ($200,000 × 4%). If the purchasing manager places 8 orders of 50 pounds each, Valley’s total cost can be calculated as follows: Annual ordering costs $ 1,600 Annual carrying costs 2,500 Annual discounts lost 8,000
Total cost $12,100
A review of the inventories of Cedar Grove Company shows the following cost data for entertainment centers.
Invoice price $400.00 per unit
Freight and insurance on shipment 20.00 per unit
Insurance on inventory 15.00 per unit
Unloading 140.00 per order
Cost of placing orders 10.00 per order
Cost of capital 25
What are the total carrying costs of inventory for an entertainment center?
Answer (C) is correct. The cost of carrying a unit of inventory can be calculated as follows: Invoice price $400 Freight and insurance on shipment 20
Per-unit purchase cost $420 Times: cost of capital × 25
Opportunity cost $105 Insurance on inventory 15
Per-unit carrying cost $120
Paint Corporation expects to use 48,000 gallons of paint per year costing $12 per gallon. Inventory carrying cost is equal to 20% of the purchase price. The company uses its inventory at a constant rate. The lead time for placing the order is 3 days, and Paint Corporation holds 2,400 gallons of paint as safety stock. If the company orders 2,000 gallons of paint per order, what is the cost of carrying inventory?
Answer (D) is correct. Paint’s per-gallon carrying cost is $2.40 ($12 purchase price per gallon × 20% carrying cost). The cost of carrying safety stock is $5,760 (2,400 gallons × $2.40), and the cost of carrying average inventory is $2,400 (1,000 gallons × $2.40). Thus, total inventory carrying cost is $8,160 ($5,760 + $2,400).
James Smith is the new manager of inventory at American Electronics, a major retailer. He is developing an inventory control system and knows he should consider establishing a safety stock level. The safety stock can protect against all of the following risks except for the possibility that
Answer (D) is correct. Safety stock cannot protect against the entry of new competitors.
Carnes Industries uses the economic order quantity (EOQ) model as part of its inventory control program. An increase in which one of the following variables would increase the EOQ?
Answer (C) is correct. Fixed cost per order is in the numerator of the EOQ fraction. An increase results in an increase in the EOQ.
Which one of the following is not explicitly considered in the standard calculation of economic order quantity (EOQ)?
Answer (D) is correct. Quantity discounts are not a factor in the EOQ formula
Which one of the following statements concerning the economic order quantity (EOQ) is correct?
Answer (D) is correct. One of the underlying assumptions of the EOQ model is that delivery times are predictably consistent. Other assumptions are that sales are perfectly predictable and that usage is constant.