Financial Management for Project Managers Inventory Management 4 β Questions and Answers
Question 1: A project manager needs to calculate safety stock. Daily demand is normally distributed with a mean of 100 units and a standard deviation of 15 units. Lead time is 4 days and the desired service level requires a Z-score of 1.65. What is the safety stock?
- 24.75 units
- 49.5 units (Correct answer)
- 99 units
- 24 units
Correct answer: 49.5 units
Safety Stock = Z Γ Ο_demand Γ βLead Time = 1.65 Γ 15 Γ β4 = 1.65 Γ 15 Γ 2 = 49.5 units.
Question 2: Under which inventory system does a company place orders at fixed time intervals regardless of current stock levels?
- Continuous review (Q) system
- Periodic review (P) system (Correct answer)
- Kanban system
- Material Requirements Planning (MRP)
Correct answer: Periodic review (P) system
The periodic review (P) system triggers orders at predetermined time intervals, with order quantity varying based on current inventory levels at review time.
Question 3: Which of the following best describes the 'bullwhip effect' in supply chain inventory management?
- Demand is stable but prices fluctuate wildly
- Small demand variations at retail amplify into large order swings upstream (Correct answer)
- Safety stock increases proportionally with supply chain length
- Lead time variability causes proportional demand variability
Correct answer: Small demand variations at retail amplify into large order swings upstream
The bullwhip effect occurs when small fluctuations in end-customer demand get progressively amplified as orders move upstream through the supply chain.
Question 4: A project manager is analyzing inventory on a balance sheet that uses LIFO. During inflation, how does LIFO affect balance sheet inventory values compared to FIFO?
- LIFO reports higher inventory values
- LIFO reports lower inventory values (Correct answer)
- Both methods report identical inventory values
- The difference depends on the asset turnover ratio
Correct answer: LIFO reports lower inventory values
Under LIFO during inflation, ending inventory retains older (lower) costs, resulting in understated balance sheet inventory values compared to FIFO.
Question 5: What is the primary purpose of a 'LIFO reserve' disclosure in financial statements?
- To report the tax benefit from using LIFO
- To allow analysts to convert LIFO financials to FIFO for comparison (Correct answer)
- To identify slow-moving inventory items
- To track the difference between standard and actual costs
Correct answer: To allow analysts to convert LIFO financials to FIFO for comparison
The LIFO reserve represents the cumulative difference between LIFO and FIFO inventory values, enabling analysts to adjust financials for cross-company comparisons.
Question 6: A warehouse uses cross-docking for certain product lines. Which inventory cost is most significantly reduced by this approach?
- Ordering costs
- Holding costs (Correct answer)
- Shortage costs
- Quality control costs
Correct answer: Holding costs
Cross-docking transfers goods directly from inbound to outbound without storage, virtually eliminating holding costs for those items.
Question 7: A project manager observes that the Gross Margin Return on Investment (GMROI) for a product line is below 1.0. What does this indicate?
- The product line generates more gross profit than the cost of inventory investment
- The product line does not generate enough gross margin to cover inventory investment (Correct answer)
- The inventory turnover rate is above industry average
- Holding costs exceed ordering costs for this product
Correct answer: The product line does not generate enough gross margin to cover inventory investment
GMROI below 1.0 means for every dollar invested in inventory, less than one dollar of gross margin is generated, indicating poor return on inventory investment.
Financial Management for Project Managers Inventory Management 4
A project manager needs to calculate safety stock.
Daily demand is normally distributed with a mean of 100 units and a standard deviation of 15 units.
Lead time is 4 days and the desired service level requires a Z-score of 1.65.
What is the safety stock?