QUESTION 1 Which of the following statements is TRUE? a. The average amount of s
ID: 348161 • Letter: Q
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QUESTION 1 Which of the following statements is TRUE? a. The average amount of safety stock depends on the size of orders placed with the supplier b. The average amount of cycle stock depends on the size of orders placed with the supplier. c. Safety stock is the amount of inventory on hand when an order from the supplier is placed. d. Cycle stock is the expected amount of inventory on hand when an order arrives from the supplier. e. All four answer choices are TRUE. QUESTION 2 Consider an oilfield service company ( OSC) that stocks a specific type of compressor, which they source from an American supplier. Since this compressor is the only product that OSC sources from that specific supplier, and given relatively steady demand of 2,000 compressors throughout the year, OSC uses a Continuous Review (Q) system for managing the inventory of this compressor. Orders to replenish stock requires administrative and other work that is estimated to be $40 per order. The compressors are purchased from the supplier for $325 each. It is estimated that annual inventory holding costs are 18% of the value of the item. The time from when an order is placed with the supplier until it arrives averages three weeks (including time to clear customs) What is the order quantity that OSC should use for these compressors if they wish to minimize total annual holding and ordering costs? a. 22 b. 52 C. 44 d. 115 e. 47Explanation / Answer
ANSWER TO QUESTION 1 :
Reorder point is defined as = Cycle stock + Safety stock
Also it can be interpreted that Reorder point is the inventory on hand when an order is placed
Cycle stock is the average amount of inventory a business needs to meet customer demand between the times it orders more inventory from suppliers. A company goes through its cycle stock inventory as it sells products and restocks inventory.
The correct answer therefore should be “ b. The average amount of cycle stock depends on the size of the order placed with the supplier”
ANSWER TO QUESTION 2 :
We have to determine the order quantity which minimizes total annual holding plus ordering cost as per EOQ ( Economic Order Quantity ) Model.
Given are the following data :
Annual demand = D = 2000
Ordering cost = Co = $40
Annual unit inventory holding cost = Ch = 18% of $325 = $58.50
Therefore , EOQ = Square root ( 2 x Co x D / Ch ) = Square root ( 2 x 40 x 2000/58.50 ) = 52.29 ( 52 rounded to nearest whole number )
REQUIRED ORDER QUANTITY = 52
REQUIRED ORDER QUANTITY = 52
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