The document discusses inventory models and safety stocks. It begins by addressing questions about relevant costs for procurement decisions, limitations of the basic EOQ model, and costs associated with changeovers in manufacturing. It then discusses topics like joint production runs, assumptions in inventory control calculations, computing order quantities when costs differ, and challenges with coordinating multiple functions like inventory control, purchasing, and distribution. The document provides detailed responses and examples to demonstrate concepts in inventory management.
This presentation explains about the Operations Management concept Reorder point, different cases with examples, fixed order interval model, single period model etc.
Important mcqs for final Managerial AccountingZiyad Zaidi
Import Mcqs for final and Mids belongs to managerial accounting subject. And answerer are also mentioned in this file. If You are a student of Hummayan Farid Uddin and you found this document means you are lucky
This presentation explains about the Operations Management concept Reorder point, different cases with examples, fixed order interval model, single period model etc.
Important mcqs for final Managerial AccountingZiyad Zaidi
Import Mcqs for final and Mids belongs to managerial accounting subject. And answerer are also mentioned in this file. If You are a student of Hummayan Farid Uddin and you found this document means you are lucky
Management AccountingActivity Based Costing vs Absorption Cost.docxinfantsuk
Management Accounting
Activity Based Costing vs Absorption Costing
Table of Contents
Budgeted Profit Statements 1
1.1 Absorption Costing 1
1.2 Activity Based Costing 3
1.3 Comments on the results 5
2.0 Discussion of the statement 6
References 9
0
2
1.0 Budgeted Profit Statements
1.1 Absorption Costing
Traditional absorption costing involves the calculation of product cost, using direct and indirect variable costs and fixed and variable overheads, which are substituted over the complete production. Overhead cost substitution is based upon the process activity that drives the cost. Machine hours and assembly hours are two example activities that influence product development; overheads are allocated based upon the hours consumed in each department.
The following table summarises the activity levels involved in the production process:
Product
Units
Machine (Hours)
Assembly (Hours)
Setups
Orders
Suppliers
XYI
50,000
100,000
350,000
120
8,000
3,000
YZT
40,000
200,000
120,000
200
8,000
4,000
ABW
30,000
120,000
60,000
200
16,000
4,200
Total
120,000
420,000
530,000
520
32,000
11,200
When the cost is allocated to each product, finding each product’s contribution towards overhead provides a clearer picture. The following table summarises the total contributions of the three products.
Total Contribution
Products
Selling Price (£)
(1)
Cost Price (£)
(2)
Contribution (£)
(3)= (1)-(2)
Units
(4)
Total Contribution (5)= (3)x(4)
XYI
45
32
13
50,000
650,000
YZT
95
84
11
40,000
440,000
ABW
73
65
8
30,000
240,000
The absorption rate on which the overhead cost is allocated to the products is also important in making the profit and loss statement. Since this involves two significant activities, the overhead is allocated over these two cost drivers.
· O/H Absorption rate (Machine Hours)
Overheads / machine hours = £504,000 / 420,000 = £1.20/hour
· O/H Absorption rate (Assembly Hours)
Overheads / assembly hours = £437,000 / 530,000 = £0.8245/hour
Based upon absorption rates, the following table summarises the division of overhead costs over the three products.
Machine Hours
Assembly Hours
Products
Hours
(1)
Rate
(2)
Overheads
(3)=(1)*(2)
Hours
(4)
Rate
(5)
Overheads
(6)=(4)*(5)
Total O/H
(7)=(3)+(6)
XYI
100,000
1.20
120,000
350,000
0.8245
288,575
408,575
YZT
200,000
1.20
240,000
120,000
0.8245
98,940
298,940
ABW
120,000
1.20
144,000
60,000
0.8245
49,470
169,470
504,000
436,985
940,985
· Statement of Profit / (Loss)
Using Absorption Costing Method
Revenue
XYI
YZT
ABW
(1) Units
50,000 units
40,000 units
30,000 units
(£)
(£)
(£)
(£)
(2) Sale Price
45
95
73
(3) Cost Price
32
84
65
(4) Contribution (2) – (3)
13
11
8
Total Contribution (4) * (1)
650,000
440,000
240,000
1,330,000
Overheads *
(408,575)
(298,940)
(169,470)
(940,985)
Net Profit
241,425
101,060
46,530
389,015
1.2 Activity Based Costing
The focus of activity based costing is upon departmentalizing overheads cost; this cost can be attributed to th ...
1. Suppose a firm decides to minimize its holdings of current asse.docxjackiewalcutt
1. Suppose a firm decides to minimize its holdings of current assets, relative to sales. Which statements are true?
Answer
1.
The firm's expected profits will decrease.
2.
The firm's expected profits will increase.
3.
The risk of the firm's profits will decrease.
4.
The risk of the firm's profits will increase.
2. A firm uses the EOQ model to detemine its optimal order quantity, but is considering adding a safety stock of 1,000 units to meet unexpected demand, or to cover demand during variations in lead time. Check all of the statements that are correct if it starts holding safety stocks.
Answer
a.
The firm's annual total carrying cost (TCC) will increase.
b.
The firm's annual total ordering cost (TOC) will decrease.
c.
The firm's annual total inventory cost (TIC) will increase.
3. Match the term in the left column with the description in the right column.
credit period length of time customers are given to pay for purchases
discount reduction in amount owed if invoice is paid early
credit standard required financial strength of acceptable credit customer
collection policy procedures followed to collect past-due accounts
Inventory Management
FIN 340
Prof. David S. Allen
Northern Arizona University
Types of InventoryRaw materials inventory:
Factors of production that will be used in a later stage of production or assembly.Work-in-progress inventory:
Partially assembled or completed goods.Finished goods inventory:
Items ready for distribution or sale.
Types of InventoryIndependent items: Have demand unrelated to the requirements for other items, e.g. finished goods.
Independent items lend themselves to analysis by quantitative techniques.Dependent items: Derive their demand from the need for other items or finished products, e.g. raw materials or work-in-progress.
The demand for the end product is used to infer demand for its components, subcomponents, and raw materials, This is combined with the existing inventory balances to establish a net requirement.
Benefits of Holding InventoryFor finished goods, most marketing analyses suggest that product availability is the most important factor in customer satisfaction.The ability to order in larger lot sizes can create economies of scale in pricing, handling, and setups.In manufacturing, inventory decouples supply and demand. It makes possible longer production runs and more flexibility in the manufacturing process.Inventory also can enhance firm liquidity. In periods of high cash flows, the firm can invest excess cash in building up inventory. When cash flows are lower, the firm can sell off excess inventory without replacing it in order to generate cash.
Costs of Holding InventoryOrdering costs: The fixed and variable costs resulting from the placement and processing of an order.
These include freight, labor, and handling charges. They are generally assumed to be proportional to the number of orders placed. In a produ ...
References:
Inventory Control Models, 2013 Pearson Education, Inc. publishing as Prentice Hall
Special Inventory Models, 2010 Pearson Education, Inc. publishing as Prentice Hall
6.3 Further Business Applications: Economic Lot Size
Dr. Grethe Hystad, Mathematics Department, The University of Arizona (www.math.arizona.edu)
Business Dictionary (www.businessdictionary.com)
Oprah Winfrey: A Leader in Media, Philanthropy, and Empowerment | CIO Women M...CIOWomenMagazine
This person is none other than Oprah Winfrey, a highly influential figure whose impact extends beyond television. This article will delve into the remarkable life and lasting legacy of Oprah. Her story serves as a reminder of the importance of perseverance, compassion, and firm determination.
The case study discusses the potential of drone delivery and the challenges that need to be addressed before it becomes widespread.
Key takeaways:
Drone delivery is in its early stages: Amazon's trial in the UK demonstrates the potential for faster deliveries, but it's still limited by regulations and technology.
Regulations are a major hurdle: Safety concerns around drone collisions with airplanes and people have led to restrictions on flight height and location.
Other challenges exist: Who will use drone delivery the most? Is it cost-effective compared to traditional delivery trucks?
Discussion questions:
Managerial challenges: Integrating drones requires planning for new infrastructure, training staff, and navigating regulations. There are also marketing and recruitment considerations specific to this technology.
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Demographics matter: Younger generations might be more receptive to drone delivery, while older populations might have concerns.
Stakeholders for Amazon: Customers, regulators, aviation authorities, and competitors are all stakeholders. Regulators likely hold the greatest influence as they determine the feasibility of drone delivery.
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Artificial intelligence (AI) offers new opportunities to radically reinvent the way we do business. This study explores how CEOs and top decision makers around the world are responding to the transformative potential of AI.
1. Chapter 21: Inventory Models and Safety Stocks
Response to Questions:
1. Material delivery cost is relevant for procurement decisions such as:
“Where to source the supplies from?” For the purchasing manager,
material delivery cost is a ‘controllable’ cost. The number of deliveries, the
distance, and the type of the carrier or mode of transport are important
elements of the procurement cost.
2. Basic EOQ model is a static model and does not take into account the
uncertainties in either the demand or the supply of the item. It assumes a
constant rate of usage and in ‘lumpy’ demand situations this model is not
quite appropriate. The EOQ concept of ‘balancing’ various costs – such as
balancing the procurement costs and carrying costs – is a useful concept.
It could find use despite the model per se not being valid.
3. Changeover from one item to another in a manufacturing facility would
involve the cost of:
a) time spent in changing over,
b) rework, scrap, rejects during the setup and
c) paper work.
Costs (a) & (b) may be different for different sequences.
4. Yes, it would. One has to identify the least cost sequence in the joint
production run.
5. When product-runs are calculated individually, one assumes an ‘average’
set-up time, in an attempt to make the computations independent of the
sequencing decisions. Please note that inventory control calculations are
indeed based on several assumptions.
6. As mentioned in the earlier question, the set-up costs will differ for A, B
and C. The ‘joint cycle’ formula can be used without much difficulty.
7. The activities done before the material is procured and those done before
the material is processed are the cost generators. In manufacturing, the
cost is generated due to waiting of the plant/machinery/manpower. In
purchasing, the cost is generated mainly due to the various paperwork,
phone, fax, receipt and inspection activities. Thus, the components of the
cost are dissimilar. The similarity is that these are pre-manufacturing costs
and can be reduced to a bare minimum.
With proper technical action the manufacturing set-ups could be made
‘single touch’ setups; and with good supplier tie-ups and supply chains,
2. 2
the purchasing order costs could come down drastically. A batch can be
loaded immediately or a material can arrive just in time with minimal
ordering effort.
8. One of the components of carrying costs, viz. the capital cost, is amenable
to be expressed as a fraction of the value of the item. But, the other
components are not. Hence, expressing the carrying cost as a fraction of
the value of the item would not be an accurate way of computing the order
quantities. However, in any case, the ‘cost of capital’ itself is a nebulous
concept; and many simplifications exist in the inventory model itself.
Hence, expressing carrying cost as a fraction of the value of an item offers
much convenience adding only a little more to the existing simplification.
9. When a number of raw materials are procured:
(i) the difficulty is in apportioning order costs to the different
materials (How to divide telephone, follow up charges? How to
apportion effort?);
(ii) there is difficulty in also apportioning the space, materials
handling and insurance costs.
10. Aggregate inventory control can be done by using a Fixed Order Period
model. The carrying cost can also be expressed as a fraction of the value
of inventory.
11. Cost of not being able to fill an order is the shortage cost. However, there
are a number of ways in which a shortage can be met. The items could be
outsourced, borrowed, postponed, or staggered. Hence, computing the
shortage cost becomes difficult.
12. Stock-out can be expressed in terms of
(a) risk level: as done in the chapter, or in terms of
(b) shortage costs (explicit in money terms).
13. Safety stock is there to provide uninterrupted supply to the
production/operations, despite the vagaries in the supplies market and the
changes in the internal production demand.
14. Both R&M are needed simultaneously in order to make the product.
Service levels required = √ 95 / 100
= 0.9747 or 0.975
That is, a service level of 97.5% is required.
3. 3
15.In a fixed order quantity model, the correction (replenishment) takes place
after 1 lead time period. In fixed order period model, the correction takes
place only after a time period of (Lead time + Review period).
16.The fixed order cycle model is preferred when the order for the various
items is to be placed at the same time. This is convenient. However, the
safety stocks required are larger. Hence, the firm may prefer fixed order
quantity model.
17.The time between order and receipt is the ’lead time’. However, lead time
is not just the external (supplier’s) lead time. The internal lead time could
be as big as the external lead time and, hence, needs serious
consideration. How early the need should be communicated is the
question. Internal lead time involves the internal paper-work and other
communication to get the external ordering process started.
18. Inventory Control suggests generalized procedures, whereas Purchasing
and Physical Distribution functions could suggest response to specific
situations in the external market – when there is a dearth or a glut in the
market, when shipments are possible and when they are not. Hence, the
Purchase Manager and Manager of Logistics may want the Inventory
Control to be tempered by the realities of the external environment.
19.Inventory of materials is one type of operations capacity. Inventory could
give the firm the flexibility to respond to sudden demand surges. Hence,
carrying inventory is one of the operations strategies.
However, the other capacity-related strategies could include an ‘inventory’
of manpower, outsourcing and carrying back-orders. Manufacturing
strategies could relate to costs, agility, quality, timeliness, new
technologies etc. Thus, inventory is only a ‘part’ of the manufacturing
strategy.
20.The answer to this question is given in the previous response.
“Optimization of what?“ is the question that one needs to ask. Cost
optimization is not the only objective in front of the management of the
firm. Inventory models express one kind of efficiency and/or effectiveness
that is desired in the organization.
21.Inventory control, Purchasing, Manufacturing, Sales and Physical
Distribution are different aspects of management that need to be
integrated. These different activities need to be coordinated towards the
common organizational set of objectives.
4. 4
22.Here Ku, the understocking cost, is the profit forgone, which is the
difference between sales price per unit and unit cost: (80p – 55p) = 25p.
Ko, the overstocking cost, is the loss in sale on the next day; which is the
difference between the cost per unit and the salvage value per unit: 55p –
40p = 15p.
F(x*) = Ku = 0.25 = 0.625
Ku + Ko 0.25 + 0.15
This is met at x = 700, where the cumulative probability is 0.650 slightly
exceeding the value 0.625.
Assuming that Iyengar makes buns only in 100’s, he should make 700
buns.
23.The service level is defined here in terms of 2 stock-outs in a year. This
necessitates that we know the number of ordering situations in a year.
Therefore, we need to find the EOQ for which the data is available.
EOQ = √ 2ACo
Cc
where A = annual demand = 52 x 1000 units
Co = Rs 200 per order
Cc = Rs 5 per unit
Therefore EOQ = √ 2X52000X200 = 2039.6 units
5
Number of ordering cycles per year A = 52000 = 25.5 = say 26.
Q 2039.6
∴ Service level is 26 -2 = 0.9231
26
This corresponds to a z value of 1.425 (this value is found by referring to
the Normal Distribution table given in Appendix II pg. 21.37)
Since the standard deviation of the usage during a week (which is also the
lead time) is 200 units, the safety stock required is:
(x - µ) = z.σ = 1.425 X 200 = 285 units
5. 5
This is shown in the Figure below.
24.p = 5,000 m/hr, r = 20,000/8 = 2,500 m/hr
A = (20,000 X 365) m/year
CO = 450 per set-up
Cc = 5x0.25 = Rs. 1.25 per m. per year
EBQ =
2 X 450 X (20000 x 365) = 1,02,528 m.
1.25 X (2500 / 5000)
No. of cycles required in a year = 20000 X 365 = 71.2 = 71 approx.
102528
If we make it 73 cycles, then the cycles are taken after every 5 days
(365/73 = 5).
6. 6
25. Solution : Q3opt = 2 x A x C0
s3 x f
where A = 10,000 C0 = Rs 300
f = 0.20 s3 = 9.70
Q3opt = 2 x 10000 x 300 = 1758.6
9.70 x 0.20
This quantity is in the middle price range and not in the range where price
s3 (i.e. Rs 9.70) prevails. Therefore, let us find Q2opt.
Q2opt = 2 x 10000 x 300 = 1745.2
9.85 x 0.20
This falls within its feasible range, because, for this quantity the price s2
(i.e. Rs 9.85) prevails. Refer to the following figure:
(TC)
T
o
t
a
l
c
o
s
t
s
Total cost vs Quantity Relationship for the Problem
The cost at Q2optimal = C0 . __A___ + s2 . f. Q2opt + (A . s2)
Q2opt 2
7. 7
= 300 x 10000 + 9.85 x 0.20 x 1745.2 + (10000 x 9.85)
1795.2 2
= 1719 + 1719 + 98,500 = Rs 1,01,938
We should compare the total costs at Q2opt with the total costs at b2 (i.e. second
price-break quantity).
Total costs at b2 = C0 . A + s3 .f. b2 + (A . s3)
b2 2
= 300 x 10000 + 9.70 x 0.20 x 300 + (10000 x 9.70)
3000 2
= 1000 + 2910 + 97000 = Rs 1,00,910
Therefore, TC (b2) < TC (Q2opt)
Thus, economic order quantity = b2 = 3000 units.
26.The problem is to:
Minimize 5 Qisi (1)
∑ 2
i = 1
(Note: Qisi/2 is the average stock value in Rupees for item ‘i’, Qi being the
order quantity, si, the price per unit of item ‘i’, and usage being assumed to
be uniform over time.)
The constraint is:
5 ai ≤ 10 (2)
∑ Qi
i = 1
8. 8
where ai = weekly usage of item ‘i’, in units.
Using λ as the Lagrange Multiplier, we define ‘F’ as:
5 Qisi + λ 5 ai _ 10
F = ∑ 2 ∑ Qi
i = 1 i = 1
Now, Equate ∂ F to zero and ∂ F to zero
∂ Qi ∂ λ
(i = 1, 2, …, 5)
On differentiation with respect to Qi we get, for each ‘i’:
si + λ . ai = 0
2 - Qi
2
Therefore Qi = 2λ . ai (3)
si
Now, 5 ai = 10 since ∂ F = 0
∑ Qi ∂ λ
i = 1
Substituting for Qi from Eq. (3):
5 ai . √si_ = 10 or 5 √ai si = 10
∑ √ (2λ . ai ) ∑ √(2λ)
i = 1 i = 1
Substituting the values of ai and si from the data given in the problem, we have:
1 √160x20 + √50x30 + √20x180 +√250x20 + √10x75 = 10
√(2λ)
Therefore, √λ = 17.92
Substituting the value of λ, now found, in Eq. (3):
Qi = 17.92 x 2ai …i = 1,2, …, 5
si
Thus, Q1 = 17.92 x 2x20 = 8.96 for Bushings
160
Q2 = 17.92 x 2x30 = 19.63 for Spl. Gaskets
50
9. 9
Q3 = 17.92 x 2x180 = 76.03 for Rings
20
Q4 = 17.92 x 2x20 = 7.17 for Seals
250
Q5 = 17.92 x 2x75 = 69.40 for Pins
10
The weekly orders, ni, are:
n1 = a1 = _20 = 2.23
Q1 8.96
n2 = _30 = 1.53
19.63
n3 = _180 = 2.37
76.03
n4 = _20 = 2.79
7.17
n5 = _75 = 1.08
69.40
Rounding off to the nearest possible integer, we have:
n1 = 2 (for Bushings)
n2 = 2 (for Special Gaskets)
n3 = 2 (for Rings)
n4 = 3 (for Seals)
n5 = 1 (for Pins)
∑ni = 10
The above values give the scheme of ordering for VACO.
The order sizes would, therefore, be:
_______________________________________________________
Serial No. Item No. of Orders Order Size (units)
1. Bushings 2 10
2. Spl. Gaskets 2 15
3. Rings 2 90
4. Seals 3 7, 7 and 6
5. Pins 1 75_______
10. 10
Alternative Solution:
A simple intuitive-cum-trial-&-error approach to the solution of the above problem
could also have been attempted. Such an approach may be allowed here, since
in the earlier solution the number of orders was approximated to the nearest
possible integer. Otherwise, the method involving Lagrange multiplier is quite
precise in calculating the optimal quantities.
The simplistic approach is as follows:
1. Compute the weekly usages of the items in Rupee values.
2. Find the total weekly usage of all the five items; compute the average
Rupee value per order, if 10 (maximum allowed) orders were placed.
3. It is intuitively expected that if the number of orders of each item is
calculated on the basis of average Rupee value per order (earlier
computed), the solution would be optimal or near-optimal.
4. The average stock value (in Rs) is calculated for the above solution.
5. Slight changes may be made in the number of orders for the items and
it may be checked as to whether the average stock value goes any
further down.
6. Accordingly the desired trial-&-error changes are made.
7. The minimum (average stock value) gives the optimal solution.
The computations are given below. The following table gives the first intuitive
values for the number of orders.
No. of Orders Average Stock
Sl Price per Weekly Weekly to be placed= Value
No. Item Unit Usage Usage (Weekly Usage) (Rupees)
(Rs) (units) (Rupees) (1205)
1. Bushings 60 20 1200 1 1200 = 600
1 x 2
2. Spl. Gaskets 50 30 1500 1 1500 = 750
1 x 2
3. Rings 20 180 3600 3 3600 = 600
3 x 2
4. Seals 250 20 5000 4 5000 = 633
4 x 2
5. Pins 10 75 750 1 750 = 375
1 x 2
Total = 12,050 Total = 10 Total = 2958
Average per order = 12,050 = 1,205
10
11. 11
The next set of computations try values which are slightly different from the above.
Trial No. 2 Trial No. 3
Sl Weekly No. of Orders Average No. of Orders Average Stock
No. Item Usage per Week Stock Value per Week Value
(Rupees) (Rupees) (Rupees)
1. Bushings 1200 1 600 2 300
2. Spl. Gaskets 1500 2 375 2 375
3. Rings 3600 3 600 2 900
4. Seals 5000 3 833 3 833
5. Pins 750 1 375 1 375
Total = 2783 Total = 2783
It is noted that both the trials give the same average stock value which is lower
than that found in Trial No. 1. We take one of the latter trial values (of the order
sizes) as our solution. It may be noted that trial No. 3 gives the same solution as
found by the use of Lagrange multiplier earlier.
12. 12
CHAPTER 21: Inventory Models and Safety Stocks
Objective Questions
1. Basic EOQ model assumes:
a. Order quantity is fixed
b. Rate of usage of the material is constant
√c. a & b
d. none of the above
2. When usage is varying, the basic EOQ model needs coverage (by means
of a safety stock) over :
√a. one lead time.
b. a period of time computed based upon the desired service level.
c. one standard deviation of the lead time.
d. none of the above.
3. In a ‘two-bin’ system, one of the bins is stocked equal to:
a. normal usage over the review period.
b. normal usage over the review-plus-lead time.
√c. normal usage over the lead time.
d. none of the above.
4. Re-order Point, in the absence of buffer stocks, equals:
√a. normal usage over one lead time.
b. normal usage over a review period.
c. normal usage over one lead time plus one review period.
d. none of the above.
5. For the same normal usage rate and the same lead time, which of the
following is true?
a. Q-system needs more buffer stock than the P-system of inventory
control.
b. Q-system and P-system need the same level of buffer stock.
√c. Q-system needs less buffer stock than the P-system.
d. none of the above.
6. Usage rate is 100 items per day, procurement cost is Rs. 2000 per
procurement order, the lead time is 4 days and the cost of carrying
inventory is 25 per cent. Each item costs Rs. 400. If a month is taken to
have 30 days, the economic order quantity in this case is:
a. 400
b. 800
√c. 1200
d. data inadequate
13. 13
7. For the above question (Question No.6) the safety stock, corresponding to
an enhanced usage level of 200 items per day, is:
√a. 400
b. 800
c. 1200
d. none of the above
8. Guru Provisions buy an item worth Rs.1 lakh. The inventory carrying costs
are 25 per cent and each ordering procedure involves an expenditure of
Rs. 500. How many orders should Guru place in a year?
a. 2 b. 3 c. 4 √d. 5
9. India Soaps Limited (ISL) buys 1000 tons of tallow annually. The cost of
carrying is estimated at 30 per cent and order cost is estimated at Rs.
10,000 per order. Price of tallow in the supply market is Rs. 10,000 per
ton. Allowing for an annual inflation of 20 per cent in the tallow prices,
what should be ISL’s optimal order quantity for tallow?
a. 105.5 tons
b. 122.4 tons
√c. 148.5 tons
d. 81.6 tons
10.Out of 400 orders, the 372 which were met were all for one unit each;
while the 28 which were not met, were all for five units each. The service
level, in this case, may be said to be:
a. 93 per cent
b. 72.7 per cent
c. 65.8 per cent
√d. either 93 per cent or 72.7 per cent depending upon the definition of
service level.
11.When usage rate variation is probabilistic – approximated to a normal
distribution, if the lead time increases from 1 month to 2 months, the
safety stock requirements will increase by:
√a. 41.4 %
b. 50 %
c. 70.7 %
d. 100 %
12.In a P-system of inventory control, the maximum inventory on hand plus
on order is equal to:
a. Buffer stock.
b. Order quantity plus average usage over lead time.
√c. Average usage over a review period-plus-lead time plus buffer
stock.
14. 14
d. Buffer stock plus average usage over a review period.
13.SNC–ZXLQ brand of radial tyres have a procurement lead-time of 2
weeks, a weekly usage rate of 40 units and a weekly standard deviation of
10 units. Assuming a Normal probability distribution, for a 97 per cent
service level what is the reorder point for this tyre?
a. 60
b. 67
c. 80
√d. 107
14. In the inventory model with purchase discount, the optimal quantity is
Q2 optimal (i.e. that corresponding to Price 2) if:
a. Q2 optimal is higher than Q1 optimal
b. Q2 optimal falls in the zone of Price 1
√c. Q2 optimal falls in the zone of Price 2
d. none of the above