Chapter 6 Inventory Control Models

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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.

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