business beginner 10 sample questions

Inventory Management MCQ Practice Test

Stock level optimization techniques

Q1. A supplier's defect rate is truly 5%. In a random sample of 10 units, what is the probability that at least one unit is defective?

Explanation: P(at least one defective) = 1 − P(none). Each unit is non-defective with probability 0.95, so P(none defective) = 0.95^10 ≈ 0.599, giving 1 − 0.95^10 ≈ 0.401. The old stem's Bayesian phrasing ('probability the rate is higher') and its 'negative binomial' explanation were both wrong.

Q2. A company uses a just-in-time (JIT) inventory management system and experiences frequent stockouts. To improve inventory accuracy, the company considers implementing a "cycle counting" program. Which of the following is a primary benefit of cycle counting in this scenario?

Explanation: Cycle counting involves conducting regular, smaller-scale inventory audits to identify and correct discrepancies in a timely manner. This can help improve inventory accuracy, particularly in JIT systems where stockouts can have significant consequences. By identifying and correcting errors quickly, cycle counting can reduce the likelihood of stockouts and improve overall inventory management.

Q3. A company uses a Just-In-Time (JIT) inventory management system and has a vendor-managed inventory (VMI) agreement with its supplier. The supplier is responsible for managing the inventory levels and replenishing stock when it falls below a certain threshold. However, the company also uses a statistical process control (SPC) method to monitor its inventory levels and detect any anomalies. Which of the following is the most appropriate inventory management strategy for this company?

Explanation: The company is using a JIT system and has a VMI agreement in place, which suggests that it is focused on minimizing inventory levels and maximizing supply chain efficiency. However, the use of SPC suggests that the company is also interested in monitoring and controlling its inventory levels. A hybrid inventory management system that combines elements of JIT and SPC would be the most appropriate strategy for this company, as it would allow it to balance the need for efficiency with the need for control and monitoring.

Q4. Under FIFO with a perpetual inventory system, which costs are assigned to cost of goods sold when a sale is recorded?

Explanation: FIFO assumes the earliest goods acquired are the first sold, so each sale draws cost of goods sold from the oldest cost layers remaining, while ending inventory consists of the most recent purchases. A perpetual system applies this at every sale. The old options' 'cost matched with cost' phrasing described neither FIFO nor LIFO.

Q5. A company uses a just-in-time (JIT) inventory management system to minimize stockouts and overstocking. However, due to supplier lead times and production variability, the company experiences a 20% chance of stockouts during peak demand periods. To mitigate this risk, the company considers implementing a safety stock strategy. Which of the following safety stock policies would be most effective in reducing the risk of stockouts during peak demand periods?

Explanation: A continuous (perpetual) review system monitors inventory in real time and places a replenishment order the moment stock falls to the reorder point, which includes safety stock to absorb demand and lead-time variability — the best fit for cutting stockout risk in peak periods. A periodic review policy checks stock only at fixed intervals and so must carry larger safety stocks for the same protection.

Q6. A company uses the Economic Order Quantity (EOQ) model to determine its optimal inventory replenishment quantities. The company has a fixed ordering cost of $1,000, a fixed holding cost of $20 per unit per year, an annual demand of 100,000 units, and a lead time of 4 weeks. If the company wants to minimize its total inventory costs, which of the following is the optimal order quantity?

Explanation: The EOQ formula is Q = √(2DS/H), which requires only annual demand (D), ordering cost per order (S), and per-unit holding cost (H) — it does NOT require the unit cost. Substituting D = 100,000, S = $1,000, and H = $20 gives Q = √(2 × 100,000 × 1,000 / 20) = √10,000,000 ≈ 3,162 units.

Q7. A company uses a just-in-time (JIT) inventory management system and is considering implementing a vendor-managed inventory (VMI) program with its primary supplier. Which of the following is a key benefit of VMI in this scenario?

Explanation: In a JIT environment, the key benefit of adding VMI is that the supplier synchronizes replenishment with actual usage, letting the buyer operate with minimal on-site stock and directly cutting inventory holding costs. Enhanced collaboration is the mechanism by which that saving is achieved, not the headline benefit.

Q8. A company operates a just-in-time inventory management system with a vendor-managed inventory (VMI) program. The VMI program requires the vendor to maintain a safety stock buffer to ensure continuous supply. However, the vendor is experiencing difficulty in accurately estimating the safety stock level due to variability in customer demand. Which of the following inventory control techniques can be used to help the vendor estimate the safety stock level?

Explanation: The newsvendor model is a mathematical model used to determine the optimal order quantity and safety stock level to meet customer demand with a specified service level. In this case, the vendor can use the newsvendor model to estimate the safety stock level based on the historical demand data and the desired service level of 95%

Q9. A company uses a just-in-time inventory system and has a vendor-managed inventory (VMI) agreement with a key supplier. The supplier is responsible for maintaining a safety stock of 10% of the average daily demand. However, the supplier has recently implemented a new forecasting algorithm that has resulted in an increase in the forecast error rate. Which of the following actions would be most appropriate for the company to take in response to this change?

Explanation: The company should negotiate with the supplier to adjust the VMI agreement to include a buffer stock to mitigate the increased forecast error rate. This is because the supplier is responsible for maintaining the safety stock, and the company does not have control over the supplier's forecasting algorithm. Implementing a more conservative safety stock formula or increasing the reorder point may not be effective in addressing the issue, and reducing the safety stock percentage could lead to stockouts and negatively impact customer service.

Q10. A company using the Economic Order Quantity (EOQ) model for inventory management has a fixed ordering cost of $100, a holding cost of $5 per unit per year, and an annual demand of 20,000 units. What is the optimal order quantity (EOQ) that minimizes the total inventory cost?

Explanation: The EOQ formula is sqrt(2 ∙ Demand ∙ Ordering Cost / Holding Cost). Plugging in the values, EOQ = sqrt(2 ∙ 20,000 ∙ 100 / 5) = 14,142 units.

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Inventory Management MCQ Practice Test | Mind Hustle