One source of cash savings for a company is improved management of inventory. To illustrate, assume that

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One source of cash savings for a company is improved management of inventory. To illustrate, assume that Apple and Google both have $1 billion per month in sales of one model of smartphone in Canada, and both forecast this level of sales per month for the next 24 months. Also assume that both Apple and Google have a 20% contribution margin, their fixed costs are equal, and that cost of goods sold is the only variable cost. Assume that the main difference between Apple and Google is the distribution system. Apple uses a just-in-time system and requires ending inventory of only 10% of next month's sales in inventory at each month-end. However, Google is building an improved distribution system and currently requires 30% of next month's sales in inventory at each month-end.
Required
1. Compute the amount by which Google can reduce its inventory level if it can match Apple's system of maintaining an inventory equal to 10% of next month's sales.
2. Explain how the analysis in part 1 that shows ending inventory levels for both the 30% and 10% required inventory policies can help justify a just-in-time inventory system. Assume a 15% interest cost for resources that are tied up in ending inventory.
Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
Ending Inventory
The ending inventory is the amount of inventory that a business is required to present on its balance sheet. It can be calculated using the ending inventory formula                Ending Inventory Formula =...
Distribution
The word "distribution" has several meanings in the financial world, most of them pertaining to the payment of assets from a fund, account, or individual security to an investor or beneficiary. Retirement account distributions are among the most...
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Managerial Accounting

ISBN: 978-0078025600

5th edition

Authors: John Wild, Ken Shaw

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