Questions and Answers
What is a primary aim of a Just-in-Time (JIT) system?
Traditional systems aim to reduce inventory levels and optimise production based on actual sales.
False
What are the two main components of a JIT system?
JIT purchasing and JIT production
In a traditional inventory management system, management tries to avoid running out of inventories of raw materials and __________.
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Which of the following statements best describes an 'efficient' management approach in a traditional system?
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In traditional systems, purchasers generally trust suppliers to deliver the correct quantities and quality.
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What is often checked upon delivery from suppliers in a traditional inventory management system?
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Match the following terms with their descriptions:
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Which of the following is NOT a reason for holding inventories?
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Interest charges are incurred due to holding lower levels of inventory.
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What is the primary objective of inventory control?
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The formula for average inventory is: Average inventory = safety inventory + _____ reorder quantity.
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Which of the following represents stockout costs?
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A higher maximum inventory level is always beneficial to a company.
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What is the reorder level formula?
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If inventories are too high, _____ costs will be incurred unnecessarily.
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What does a minimum level of inventory represent?
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Match the inventory cost with its description:
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The reorder quantity is determined when inventory levels reach the reorder level.
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What is the maximum lead time in the context of inventory control?
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If average usage is 350 units per day, the reorder level would need to consider the _____ lead time.
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What does the formula 'Maximum level = reorder level + reorder quantity - (minimum usage × minimum lead time)' pertain to?
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Which changes in working practices are likely to be necessary? (Select all that apply)
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Value is added to a product while it is inspected for quality.
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What is a primary benefit of Just-in-Time (JIT) manufacturing?
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JIT manufacturing aims to minimize ________ time by synchronizing production with demand.
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Match the following activities with their classification as value-added or non-value-added:
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Which of these costs may increase as a result of smaller batch sizes in JIT manufacturing?
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JIT can be applied to all types of products without exception.
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What disaster significantly disrupted the automotive supply chain in 1995?
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Nissan's stockholding of components is as low as ________ minutes.
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Match the effects of adopting JIT with their consequences:
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What is a possible drawback of JIT manufacturing?
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Just-in-Time manufacturing was first developed by Ford.
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What is one reason that traditional inventory control systems might still be preferred in some situations?
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In JIT, relationships with ________ are crucial for timely production.
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In the automotive industry, how many parts can a single car require?
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What is the main objective of Just-in-Time (JIT) systems?
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JIT systems operate on a push basis, using stocks as buffers.
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What does JIT management primarily aim to eliminate?
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In a JIT environment, suppliers are responsible for the quality of goods according to the _______ philosophy.
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Match the following elements of JIT management with their descriptions:
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Which of the following is a characteristic of a JIT system?
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A key element of JIT is to keep inventory levels at maximum for operational efficiency.
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What is the purpose of a Kanban in a JIT system?
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JIT emphasizes _______ involvement in the production process.
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What is the expected outcome of implementing JIT systems?
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In JIT systems, it is essential to conduct extensive quality checks for incoming materials.
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What role does preventive maintenance play in a JIT system?
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JIT relies heavily on _______ for coordinating supply chain activities.
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Match the following descriptions with their corresponding JIT principles:
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Which of the following statements about the bin system is true?
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In the ABC method of stores control, Group A materials are considered inexpensive.
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What is the Pareto principle also known as?
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The ABC method classifies materials into groups A, B, and C based on their __________.
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Match the following types of pricing with their definitions:
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What is a key advantage of the full cost-plus pricing method?
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The mark-up in full cost-plus pricing is fixed and cannot be varied.
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What does the term 'marginal cost' refer to?
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The full cost of a product is $4.70, and it is sold at full cost plus 70%. The selling price is __________.
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Which of the following costs is NOT typically included in full cost-plus pricing?
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An advantage of marginal cost-plus pricing is that it draws attention to gross profit margins.
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What percentage profit mark-up is desired on the full production cost from product X?
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The fixed overheads budgeted are $ __________ per month.
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Match the type of inventory control with its description:
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What does EOQ stand for?
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The cost of holding inventory increases as the level of inventories decreases.
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What is the formula for calculating EOQ?
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The reorder quantity can include a buffer inventory, indicated as __________.
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Match the following inventory management terms with their descriptions:
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What is the total annual cost of holding inventory for a component if the holding cost is $2 per unit and there is a buffer of 500 components?
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In the economic order quantity model, ordering costs decrease as order quantity increases.
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How does the average inventory relate to the reorder quantity if there is no safety inventory?
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The total annual relevant costs are minimized at an order quantity of __________ units.
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What happens to the holding costs as the average inventory level increases?
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The total cost line in an EOQ graph shows a direct relationship with both holding and ordering costs.
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What is the cost of placing an order in the provided example?
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What is a major advantage of using a marginal cost-plus pricing approach?
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Match the following components with their respective values as per the worked examples:
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A major drawback of marginal cost-plus pricing is that it adequately considers fixed overheads.
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What happens during the saturation and decline stage of the product lifecycle?
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Which system emphasizes the periodic review of quantities on hand?
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What occurs at the point where the holding costs equal ordering costs in an EOQ graph?
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In a perfect competition market, there are many buyers and many sellers dealing in _____ products.
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The __________ system of inventory control relies on two storage containers for each item.
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Match the market types with their characteristics:
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How does a company typically respond if a competitor lowers their prices?
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The growth stage in the product lifecycle is characterized by declining demand.
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What is a common fixed mark-up percentage used by retailers?
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The contribution margin affects how much additional revenue contributes to _____ and profit.
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Match the pricing approaches with their definitions:
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What is one disadvantage of a marginal cost-plus pricing strategy?
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During the maturity stage, a product may still be modified to sustain demand.
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What is the primary focus of the marginal cost-plus pricing approach?
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In an _____ market, a single seller dominates and has the power to set prices.
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Which pricing approach bases prices primarily on what consumers demand rather than on costs?
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What is the primary goal of price leadership in an oligopoly?
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Market penetration pricing sets initial prices high to maximize early profits.
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What is the aim of market skimming pricing?
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Differential pricing can be based on ________, product version, place, or time.
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Match the pricing strategies with their characteristics:
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What does price elasticity of demand measure?
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Perfectly elastic demand means that buyers will purchase any quantity at any price.
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In elastic demand situations, what happens to revenue if prices are increased?
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A company using __________ pricing aims to discourage new competitors by capturing significant market share quickly.
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Match the following pricing types with their basic strategy:
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Which of the following is a typical example of differential pricing?
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Raising prices in inelastic demand conditions can lead to increased revenue.
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What is the significance of understanding price elasticity in pricing decisions?
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When demand is said to be ________, small price changes will lead to significant changes in quantity demanded.
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Match the phase of the product life cycle to its pricing strategy:
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What is the main focus of price theory in demand-based pricing?
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In situations of very inelastic demand, customers are sensitive to price changes.
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What must be done if the anticipated product cost is above the target cost?
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The approach that determines what customers are willing to pay for a product before developing it is called __________.
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Match the following terms with their definitions:
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Which one of these factors does NOT contribute to a firm's pricing strategy in cases of inelastic demand?
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Continuous cost reduction is necessary in the target costing approach.
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What do businesses aim to achieve when setting a transfer price?
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A company that does not follow the market on pricing is said to have a __________ position.
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Match the companies to their approach to target costing:
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What is a consequence of an increase in ticket prices when demand is elastic?
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The target cost is derived from the selling price minus the desired profit margin.
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List two factors that can influence demand other than price.
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The financial strategy that requires product modifications if costs exceed projected amounts is known as __________.
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Match the following pricing strategies with their descriptions:
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What is the primary purpose of keeping records of inter-divisional services?
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A transfer price is considered revenue for the receiving division.
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Define a profit centre.
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The total profit to the company remains unchanged regardless of the ________ charged between profit centres.
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Match the following terms with their definitions:
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Which pricing method adds a profit margin to either marginal cost or full cost?
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Higher transfer prices charged by one profit centre can improve its profitability at the expense of another.
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What issue arises in transfer pricing between profit centres?
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A profit centres manager typically aims to make a ________ from the transactions they engage in.
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Which of the following is NOT a critical control level in inventory management?
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Transfer pricing policies have no impact on managerial decision-making.
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What is the aim of a Just-in-Time (JIT) system?
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The total profit to the company if profit centre B resells the goods for $18,000 and profit centre A charges $12,000 is ________.
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Match the following pricing strategies with their descriptions:
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Study Notes
Just-in-Time (JIT) Systems Overview
- JIT systems aim for zero inventory and perfect quality, responding directly to customer demand.
- Key components include JIT purchasing and JIT production, promoting lower investment, space savings, and increased flexibility.
Traditional Inventory Management Systems
- Traditional systems rely on estimated production quantities to meet anticipated sales demand.
- Management typically ensures sufficient inventory of raw materials and finished goods to avoid shortages.
- Efficient management focuses on minimizing production costs through longer production runs and economic order quantities for bulk purchasing.
Introduction to JIT
- JIT is a pull system where production is driven by actual demand, as opposed to a push system that relies on stock buffers.
- A JIT purchasing system synchronizes material delivery with usage to reduce costs associated with holding inventory.
- Non-value-adding activities are minimized, aiming to eliminate waste and improve overall production efficiency.
Essential Elements of JIT
- Close supplier relationships are vital for quality and timely delivery.
- Uniform loading and reduction of setup times promote seamless production processes.
- Preventative maintenance is essential for ensuring operational reliability.
- Employee involvement and training contribute to a more flexible workforce capable of performing multiple roles.
Value-Added Activities in JIT
- Value is only added during active processing of products; activities like storage, inspection, and transport do not add value.
- Non-value-added activities should be eliminated to enhance efficiency and reduce costs.
Problems Associated with JIT
- Predicting demand patterns can be challenging, potentially leading to stockouts.
- JIT increases vulnerability to supply chain disruptions, demonstrated by events like the Kobe earthquake and the 2011 Japanese tsunami.
- JIT may not be suitable for all industries, particularly those with complex supply chains or critical inventory needs, such as healthcare.
Inventory Control Levels
- Inventory costs include purchase, holding, ordering, and stockout costs; effective management is critical.
- Holding inventory serves multiple purposes, including meeting demand, providing process buffers, and exploiting bulk discounts.
Critical Inventory Control Levels
- Reorder Level: Trigger point for new orders, calculated as maximum usage multiplied by maximum lead time.
- Minimum Level: Warns of potential stockouts, calculated as reorder level minus average usage during average lead time.
- Maximum Level: Indicates potentially excessive inventory; calculated using reorder level, reorder quantity, and minimum usage during minimum lead time.
Economic Order Quantity (EOQ)
- EOQ minimizes total inventory costs by determining the optimal order quantity.
- A well-managed EOQ leads to a balance between ordering costs and holding costs, optimizing inventory levels.
Summary of Inventory Management Techniques
- Effective inventory management is essential for maintaining a balance between costs, quality, and customer satisfaction.
- Techniques such as monitoring demand patterns, supplier relationships, and employing modern inventory systems (like JIT) can dramatically affect a company's efficiency and responsiveness to market trends.### Economic Order Quantity (EOQ)
- EOQ helps determine the optimal order size to minimize total inventory costs.
- Average inventory is typically half of the reorder quantity unless buffer or safety inventory is maintained.
- Holding costs rise with inventory levels; smaller orders can reduce these costs.
- Ordering costs, influenced by order frequency, include various administrative expenses and increase with smaller order quantities.
- EOQ can be visually represented in tables, graphs, or calculated using a formula.
EOQ Calculation Examples
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Type 1: EOQ Table Method
- Example: Raw material cost is 16perunitwithanannualdemandof25,000units,holdingcostof16 per unit with an annual demand of 25,000 units, holding cost of 16perunitwithanannualdemandof25,000units,holdingcostof6.40, and order cost of $32.
- EOQ determined as 500 units where total annual relevant costs are minimized.
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Type 2: EOQ Graph Method
- Holding costs increase with order quantity, while ordering costs decrease; EOQ is found where both intersect, also at 500 units.
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Type 3: EOQ Formula
- Formula: ( EOQ = \sqrt{\frac{2C_0D}{C_H}} ) where:
- ( C_H ) = holding cost per unit,
- ( C_0 ) = ordering cost per order,
- ( D ) = annual demand.
- Formula: ( EOQ = \sqrt{\frac{2C_0D}{C_H}} ) where:
Other Inventory Control Systems
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Order Cycling Method
- Reviews inventory quantities periodically; for low-cost items, may order based on a 90-60-30 day cycle.
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Two-Bin System
- Utilizes two storage bins; when one is empty, an order for replenishment is triggered. It is straightforward but may lead to inefficient inventory levels.
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Classification of Materials (ABC Method)
- Classifies items as A (expensive), B (medium cost), and C (inexpensive) for tailored inventory control based on cost sensitivity.
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Pareto Distribution
- Emphasizes that 80% of value is derived from 20% of items; critical items should be closely monitored.
Pricing Approaches
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Cost-Based Approaches
- Many companies utilize a cost-plus pricing strategy to determine prices, primarily influenced by full costs.
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Full Cost-Plus Pricing
- Sets selling price by adding a profit margin to the total cost of the product; considers production, administration, and selling expenses.
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Drawbacks of Full Cost Approach
- Fails to factor in demand-driven pricing, potentially leading to misalignment with market conditions.
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Marginal Cost-Plus Pricing
- Pricing based on variable costs plus a profit margin; encourages attention to contribution margins and flexibility in response to sales volume changes.
Market-Based Pricing Strategies
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Product Life Cycle Stages
- Introduction, Growth, Maturity, Saturation/Decline; informs pricing policies through each phase of product life.
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Market Competition Types
- Perfect Competition: Many sellers and buyers, no influence on prices.
- Monopoly: One seller dominates pricing.
- Oligopoly: Few companies influence market prices through competitive reactions.
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Price Leadership
- Major firms may establish prices that others follow, promoting stability in oligopolistic markets.
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Market Penetration Pricing
- Launches products at low prices to gain market share quickly.
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Market Skimming Pricing
- High initial prices to maximize early profits, then gradually reducing prices as the product matures.
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Differential Pricing
- A strategy where the same product can be sold at different prices to various customer segments.### Pricing Strategies
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Prices can be set based on various factors including market segment, product version, geographical location, and time of service.
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Airlines may charge different fares in different countries, such as Australia and New Zealand.
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Services like cinemas and hairdressers often provide discounts for seniors and juveniles.
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Car models frequently offer 'add-on' extras, allowing brands to cater to diverse customer preferences despite higher overall prices.
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Theatre ticket prices vary by seat location, demonstrating a common form of price discrimination.
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Railway companies employ price discrimination, charging more during peak times when demand remains high.
Price Elasticity of Demand
- Price elasticity of demand (PED) quantifies the change in quantity demanded due to price changes.
- The formula for PED is the percentage change in sales demand divided by the percentage change in sales price.
- Demand is elastic when a small price change leads to a significant change in demand (PED > 1).
- Demand is inelastic when price changes have a minimal effect on demand (PED < 1).
- Special cases include perfectly inelastic (PED = 0) where demand remains constant regardless of price, and perfectly elastic (PED = ∞) where any price increase drops demand to zero.
- Understanding elasticity aids management in pricing decisions; inelastic demand suggests prices can be raised without losing revenue, while elastic demand requires careful price adjustments.
Demand-Based Pricing
- Price theory links price, quantity demanded, and total revenue, suggesting a profit-maximizing pricing strategy can be derived.
- Accurate demand estimates across different price levels are crucial for effective pricing strategies.
- A monopolistic position allows businesses to set prices flexibly rather than following market rates, impacting demand based on price adjustments.
Target Costing
- Target costing shifts the traditional cost-price-profit paradigm, focusing on customer willingness to pay rather than production costs.
- The Japanese automotive industry pioneered this method, emphasizing cost control throughout the product life cycle.
- A target cost is determined by subtracting the desired profit margin from the price customers are willing to pay. If the expected production cost exceeds this, modifications are required.
- It emphasizes continuous cost reduction throughout the product’s life to remain competitive.
Transfer Pricing
- Transfer prices determine the cost of goods or services transferred between different units within the same company.
- Setting transfer prices balances divisional autonomy with overall corporate profitability.
- Transfer pricing must be recorded for effective planning and control, impacting both cost and revenue.
- Prices can be based on market rates, production costs, or negotiated terms, impacting profit distribution among profit centers.
Profit Centres and Pricing Disputes
- Profit centers within organizations must generate profits from their activities, with performance measured by profitability.
- Managers may face conflicts when setting transfer prices between profit centers; higher prices can improve one center’s profits at a cost to another.
- Profitability incentives can lead to pricing strategies that may ultimately harm overall corporate profit, as seen in inter-divisional transactions.
Key Pricing Concepts
- Just-In-Time (JIT) aims for minimal inventory while maintaining high quality, reducing costs, and enhancing flexibility.
- Total inventory costs encompass purchase, holding, ordering, and stock-out costs.
- Economic Order Quantity (EOQ) minimizes total inventory costs and can be calculated using various methods.
- Cost-plus pricing incorporates all costs of production plus a profit margin, while target costing focuses on consumer demand and price acceptance.
- Effective transfer pricing encourages divisional performance without harming corporate profit maximization.
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Description
This quiz covers the principles and practices of Just-in-Time (JIT) systems, including their impact on inventory management and production processes. Discover how JIT aims for zero inventory, enhances quality, and increases customer satisfaction while reducing investment requirements. Test your understanding of key concepts and practices associated with JIT systems.