CPIM Practice Exam

How is the number of orders calculated in inventory management?

1. Annual demand divided by unit cost

2. Annual demand divided by lot size quantity

3. Lot size quantity divided by annual demand

4. Annual cost divided by carrying cost rate

The correct answer is: Annual demand divided by lot size quantity

The calculation of the number of orders in inventory management is based on the concept of lot size and demand. By dividing annual demand by lot size quantity, you determine how many complete orders are needed to satisfy the expected yearly demand for a product. This approach helps in planning and optimizing inventory levels, ensuring that there is enough stock to meet customer needs without overstocking, which can lead to increased holding costs. When you use annual demand divided by lot size quantity, you effectively calculate how many times you need to order that lot size throughout the year, providing a clear insight into how frequently orders should be placed. This method is essential for maintaining operational efficiency and inventory turnover. Other options do not correctly represent how to derive the number of orders. For instance, dividing annual demand by unit cost relates to financial valuation rather than the quantity of orders needed. Similarly, dividing lot size quantity by annual demand does not pertain to order calculation and instead would yield a ratio that lacks practical application in inventory management. Lastly, annual cost divided by the carrying cost rate refers to financial metrics that do not directly inform order quantity decisions in inventory contexts.