CIM Inventory Control & Stock Replenishment 3 — Questions and Answers
Question 1: A company orders 2,400 units annually, has an ordering cost of $50 per order, and a holding cost of $2 per unit per year. What is the EOQ?
- 245 units
- 346 units (Correct answer)
- 173 units
- 490 units
Correct answer: 346 units
EOQ = √(2 × 2,400 × $50 / $2) = √(240,000 / 2) = √120,000 ≈ 346 units.
Question 2: What is 'phantom inventory' in the context of retail stock management?
- Inventory that has been written off but not physically removed
- Items that appear available in the system but are physically missing or mislocated (Correct answer)
- Safety stock that is never intended to be sold
- Consignment goods not yet recorded in the system
Correct answer: Items that appear available in the system but are physically missing or mislocated
Phantom inventory refers to items shown as in-stock in the system but unavailable on the shelf due to theft, damage, or misplacement.
Question 3: Which inventory metric measures how many times inventory is sold and replaced over a specific period?
- Days Sales of Inventory (DSI)
- Inventory turnover ratio (Correct answer)
- Fill rate
- Order cycle time
Correct answer: Inventory turnover ratio
Inventory turnover = Cost of Goods Sold / Average Inventory, measuring how frequently inventory is sold and replenished.
Question 4: In a periodic review (P) system, what happens at each review interval?
- A fixed quantity is ordered regardless of current stock
- An order is placed to bring inventory up to a target level (Correct answer)
- Inventory is counted and all discrepancies are corrected
- Safety stock levels are recalculated
Correct answer: An order is placed to bring inventory up to a target level
In a periodic review system, at each fixed review interval an order is placed to bring inventory up to a predetermined target (order-up-to) level.
Question 5: What does 'obsolescence risk' primarily influence when setting safety stock levels?
- It has no impact on safety stock decisions
- Higher obsolescence risk favors lower safety stock levels (Correct answer)
- Higher obsolescence risk justifies higher safety stock levels
- Obsolescence only affects cycle stock, not safety stock
Correct answer: Higher obsolescence risk favors lower safety stock levels
Items with high obsolescence risk should carry lower safety stock because holding excess inventory increases the chance it becomes unsellable.
Question 6: A stockout occurs when customer demand exceeds available inventory. Which cost is most directly associated with a stockout?
- Ordering cost
- Carrying cost
- Lost sales and customer dissatisfaction (Correct answer)
- Insurance cost
Correct answer: Lost sales and customer dissatisfaction
Stockouts directly cause lost sales, back-order costs, emergency sourcing expenses, and long-term customer attrition.
Question 7: Cross-docking in a distribution center primarily reduces which inventory-related cost?
- Ordering costs
- Transportation costs to suppliers
- Storage and holding costs (Correct answer)
- Quality inspection costs
Correct answer: Storage and holding costs
Cross-docking transfers goods directly from inbound to outbound transport with minimal storage, significantly reducing warehouse holding costs.
CIM Inventory Control & Stock Replenishment 3
A company orders 2,400 units annually, has an ordering cost of $50 per order, and a holding cost of $2 per unit per year.
What is the EOQ?