Matching Supply with Demand: An Introduction to Operations Management, 4e
(Cachon)
Chapter 2 The Process View of the Organization
1) Butternut is a ski resort in Massachusetts. One of their triple chair lifts unloads 1296
skiers per hour at the top of the slope. (A triple chair lift can carry three passengers per
chair.) The ride from the bottom to the top takes 5 minutes. How many skiers are riding
on the lift at any one time? (Round the answer to the nearest whole number.)
Answer: 108 skiers
Explanation: Use Little's Law. 1296 skiers/hour * 5/60 = 108 skiers
Difficulty: 3 Hard
Topic: Littles Law
AACSB: Analytical Thinking
Blooms: Apply
2) Home Depot's annual turns are 4.7, its Cost of Goods Sold (COGS) is $44.7 billion,
and its gross margin is 33%. Recall, gross margin = (Revenue – COGS) / Revenue. What
is the average inventory it holds? (Round the answer to 2 decimal places.)
Answer: $9.51 billion
Explanation: $44.7 billion / 4.7 =$9.51 billion. Note that average inventory in dollars is
measured by the cost of goods sold, thus the gross margin does not play a role in the
calculation.
Difficulty: 3 Hard
Topic: Littles Law
AACSB: Analytical Thinking
Blooms: Apply
3) A company's holding cost is 16% per year. Its annual inventory turns are 9.5. The
company buys an item for $50. What is the average cost in dollars to hold this item in
inventory? (Round the answer to 2 decimal places.)
Answer: Average cost: $ 0.84
Explanation: The item will be turned 9.5 times a year. Thus, for each turn it stays in
inventory, the holding cost is 16%/9.5 of the cost of the item. Thus, the average cost to
hold this item in inventory is $50 * (16%/9.5) = $0.84
Difficulty: 3 Hard
Topic: Inventory Turns and Inventory Costs
AACSB: Analytical Thinking
Blooms: Apply
,4) Trader Bob, an organic food retail chain, operates 365 days a year. In 2007, the
company turned its inventory approximately 25 times. The company's COGS were 60%
of its Sales and its annual Sales were about $7,000M that year. What was Trader Bob's
average inventory in 2007? (Round the answer to the nearest whole number.)
Answer: $168 million
Explanation: COGS = 0.6 × 7000M = 4200M. Inventory = COGS / Turns = 4200M / 25
= $168M
Difficulty: 3 Hard
Topic: Littles Law
AACSB: Analytical Thinking
Blooms: Apply
5) Assuming Trader Bob's annual inventory holding costs are 20% (an item that cost $10
to purchase would cost $2 to hold in inventory for one year), what is the inventory cost of
an item which sells for $20 and costs Trader Bob $12 to buy? Assume that this item has
inventory turns of 25 per year. (Round the answer to 3 decimal places.)
Answer: $0.096
Explanation: 20% per year with 25 turns is .20/25 = 0.008%. COGs is $12. So, inventory
cost is 0.008% × $12 = $0.096
Difficulty: 3 Hard
Topic: Inventory Turns and Inventory Costs
AACSB: Analytical Thinking
Blooms: Apply
[The following information applies to questions 6-7.]
Joe's Beer, Bait, & Tackle Co.
Joe's Beer, Bait, & Tackle Co. is a small chain of fishing tackle stores in northern
Minnesota. In 2009, the company's revenue was $4,300,000 and its cost of sales was
$3,200,000. Assume 52 weeks and 365 days per year.
6) Joe keeps only 5.5 days-of-supply of inventory on average because much of his
inventory is live bait and micro-brew beer, both of which have a short shelf life. What is
his annual inventory turns? (Round the answer to 2 decimal places.)
Answer: 66.36
Explanation: 365/5.5 = 66.36
Difficulty: 3 Hard
Topic: Inventory Turns and Inventory Costs
AACSB: Analytical Thinking
Blooms: Apply
,7) Given that he has 5.5-days-of-supply of inventory on average, how much inventory
does Joe have on average? (Round the answer to the nearest whole number.)
Answer: $48,219
Explanation: $3,200,000/ (365/5.5) =$48,219
Difficulty: 3 Hard
Topic: Five Reasons to Hold Inventory
AACSB: Analytical Thinking
Blooms: Apply
8) Which of the following best explains why slow turning items may not be profitable at
a brick-and-mortar retailer?
A) If turns are low, days-of-supply will also be low.
B) If turns are low, the gross margin will also be low.
C) If turns are low, the setup costs to stock the shelf will be high.
D) If turns are low, blocking and starving are more likely to occur.
E) If turns are low, units spend a long time on the retailer's shelves.
Answer: E
Explanation: a) If turns are low, days-of-supply will be high. b) it is not necessary that
the gross margin will be low, since various factors affect gross margin. c) setup costs are
not affected by turns. d) starving is less likely to occur when turns are low. e) units spend
too much time on the shelves, and this will increase the inventory holding cost.
Difficulty: 3 Hard
Topic: Inventory Turns and Inventory Costs
AACSB: Analytical Thinking
Blooms: Analyze
9) Is it possible for two firms to have the same annual inventory turns and the same
gross-margin but different days-of-supply?
A) Yes, because days-of-supply measures how long the firm can satisfy demand with its
current inventory whereas inventory turns measures the frequency at which inventory
turns over.
B) Yes, inventory turns and gross margin are related but they are independent of days-of-
supply
C) Yes, the firm with the higher days-of-supply will have the lower return on invested
capital.
D) No, if firms have the same gross-margin then they must have the same days-of-supply.
E) No, if firms have the same inventory turns then they must have the same days-of-
supply.
F) None of the above.
Answer: E
Explanation: Knowing inventory turns uniquely specifies days of supply because
inventory turns = 365/ days of supply.
Difficulty: 3 Hard
Topic: Inventory Turns and Inventory Costs
, AACSB: Analytical Thinking
Blooms: Analyze
[The following information applies to questions 10-11.]
ProofSmart Inc.
ProofSmart Inc., a supplier of home insulation materials, was burned down in a recent
fire. From the remains of what used to be the accounting ledger, the following
information was recovered:
2006 2007
Inventory $2,367,121 $2,418,257
Gross Margin 42% 45%
Inventory Turns 11 [unreadable]
Prior to the fire, ProofSmart saw a sales growth of 48% in 2007, a record performance for
the 18-year-old company. (NOTE: Gross margin is defined as 1 - (COGS/Sales).)
10) What was the sales for 2007?
Circle the answer closest to the correct answer.
A) $318,000
B) $38,000,000
C) $43,000,000
D) $66,000,000
E) $85,000,000
F) Cannot be determined from the data given
Answer: D
Explanation: 2006 COGS = 2,367,121 * 11 = $26,038,331
2006 Sales = 26,038,331 / (1-42%) = $44,893,674
2007 Sales = 44,893,674 * 148% = $66,442,638
Difficulty: 3 Hard
Topic: Inventory Turns and Inventory Costs
AACSB: Analytical Thinking
Blooms: Apply
(Cachon)
Chapter 2 The Process View of the Organization
1) Butternut is a ski resort in Massachusetts. One of their triple chair lifts unloads 1296
skiers per hour at the top of the slope. (A triple chair lift can carry three passengers per
chair.) The ride from the bottom to the top takes 5 minutes. How many skiers are riding
on the lift at any one time? (Round the answer to the nearest whole number.)
Answer: 108 skiers
Explanation: Use Little's Law. 1296 skiers/hour * 5/60 = 108 skiers
Difficulty: 3 Hard
Topic: Littles Law
AACSB: Analytical Thinking
Blooms: Apply
2) Home Depot's annual turns are 4.7, its Cost of Goods Sold (COGS) is $44.7 billion,
and its gross margin is 33%. Recall, gross margin = (Revenue – COGS) / Revenue. What
is the average inventory it holds? (Round the answer to 2 decimal places.)
Answer: $9.51 billion
Explanation: $44.7 billion / 4.7 =$9.51 billion. Note that average inventory in dollars is
measured by the cost of goods sold, thus the gross margin does not play a role in the
calculation.
Difficulty: 3 Hard
Topic: Littles Law
AACSB: Analytical Thinking
Blooms: Apply
3) A company's holding cost is 16% per year. Its annual inventory turns are 9.5. The
company buys an item for $50. What is the average cost in dollars to hold this item in
inventory? (Round the answer to 2 decimal places.)
Answer: Average cost: $ 0.84
Explanation: The item will be turned 9.5 times a year. Thus, for each turn it stays in
inventory, the holding cost is 16%/9.5 of the cost of the item. Thus, the average cost to
hold this item in inventory is $50 * (16%/9.5) = $0.84
Difficulty: 3 Hard
Topic: Inventory Turns and Inventory Costs
AACSB: Analytical Thinking
Blooms: Apply
,4) Trader Bob, an organic food retail chain, operates 365 days a year. In 2007, the
company turned its inventory approximately 25 times. The company's COGS were 60%
of its Sales and its annual Sales were about $7,000M that year. What was Trader Bob's
average inventory in 2007? (Round the answer to the nearest whole number.)
Answer: $168 million
Explanation: COGS = 0.6 × 7000M = 4200M. Inventory = COGS / Turns = 4200M / 25
= $168M
Difficulty: 3 Hard
Topic: Littles Law
AACSB: Analytical Thinking
Blooms: Apply
5) Assuming Trader Bob's annual inventory holding costs are 20% (an item that cost $10
to purchase would cost $2 to hold in inventory for one year), what is the inventory cost of
an item which sells for $20 and costs Trader Bob $12 to buy? Assume that this item has
inventory turns of 25 per year. (Round the answer to 3 decimal places.)
Answer: $0.096
Explanation: 20% per year with 25 turns is .20/25 = 0.008%. COGs is $12. So, inventory
cost is 0.008% × $12 = $0.096
Difficulty: 3 Hard
Topic: Inventory Turns and Inventory Costs
AACSB: Analytical Thinking
Blooms: Apply
[The following information applies to questions 6-7.]
Joe's Beer, Bait, & Tackle Co.
Joe's Beer, Bait, & Tackle Co. is a small chain of fishing tackle stores in northern
Minnesota. In 2009, the company's revenue was $4,300,000 and its cost of sales was
$3,200,000. Assume 52 weeks and 365 days per year.
6) Joe keeps only 5.5 days-of-supply of inventory on average because much of his
inventory is live bait and micro-brew beer, both of which have a short shelf life. What is
his annual inventory turns? (Round the answer to 2 decimal places.)
Answer: 66.36
Explanation: 365/5.5 = 66.36
Difficulty: 3 Hard
Topic: Inventory Turns and Inventory Costs
AACSB: Analytical Thinking
Blooms: Apply
,7) Given that he has 5.5-days-of-supply of inventory on average, how much inventory
does Joe have on average? (Round the answer to the nearest whole number.)
Answer: $48,219
Explanation: $3,200,000/ (365/5.5) =$48,219
Difficulty: 3 Hard
Topic: Five Reasons to Hold Inventory
AACSB: Analytical Thinking
Blooms: Apply
8) Which of the following best explains why slow turning items may not be profitable at
a brick-and-mortar retailer?
A) If turns are low, days-of-supply will also be low.
B) If turns are low, the gross margin will also be low.
C) If turns are low, the setup costs to stock the shelf will be high.
D) If turns are low, blocking and starving are more likely to occur.
E) If turns are low, units spend a long time on the retailer's shelves.
Answer: E
Explanation: a) If turns are low, days-of-supply will be high. b) it is not necessary that
the gross margin will be low, since various factors affect gross margin. c) setup costs are
not affected by turns. d) starving is less likely to occur when turns are low. e) units spend
too much time on the shelves, and this will increase the inventory holding cost.
Difficulty: 3 Hard
Topic: Inventory Turns and Inventory Costs
AACSB: Analytical Thinking
Blooms: Analyze
9) Is it possible for two firms to have the same annual inventory turns and the same
gross-margin but different days-of-supply?
A) Yes, because days-of-supply measures how long the firm can satisfy demand with its
current inventory whereas inventory turns measures the frequency at which inventory
turns over.
B) Yes, inventory turns and gross margin are related but they are independent of days-of-
supply
C) Yes, the firm with the higher days-of-supply will have the lower return on invested
capital.
D) No, if firms have the same gross-margin then they must have the same days-of-supply.
E) No, if firms have the same inventory turns then they must have the same days-of-
supply.
F) None of the above.
Answer: E
Explanation: Knowing inventory turns uniquely specifies days of supply because
inventory turns = 365/ days of supply.
Difficulty: 3 Hard
Topic: Inventory Turns and Inventory Costs
, AACSB: Analytical Thinking
Blooms: Analyze
[The following information applies to questions 10-11.]
ProofSmart Inc.
ProofSmart Inc., a supplier of home insulation materials, was burned down in a recent
fire. From the remains of what used to be the accounting ledger, the following
information was recovered:
2006 2007
Inventory $2,367,121 $2,418,257
Gross Margin 42% 45%
Inventory Turns 11 [unreadable]
Prior to the fire, ProofSmart saw a sales growth of 48% in 2007, a record performance for
the 18-year-old company. (NOTE: Gross margin is defined as 1 - (COGS/Sales).)
10) What was the sales for 2007?
Circle the answer closest to the correct answer.
A) $318,000
B) $38,000,000
C) $43,000,000
D) $66,000,000
E) $85,000,000
F) Cannot be determined from the data given
Answer: D
Explanation: 2006 COGS = 2,367,121 * 11 = $26,038,331
2006 Sales = 26,038,331 / (1-42%) = $44,893,674
2007 Sales = 44,893,674 * 148% = $66,442,638
Difficulty: 3 Hard
Topic: Inventory Turns and Inventory Costs
AACSB: Analytical Thinking
Blooms: Apply
