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Determining A, B & C: A Finished product average inventory = 1/2 order quantity + all safety stock. For example, when a warehouse orders and receives shipments of 10 units every 10 days and ships 1 unit per day to the retail store and carries a safety stock of 2 units, the average inventory is 1/2 (10) + 2 = 7 units. B Product cost increases as it is produced and moved. Manufacturers use variable manufacturing cost per unit and retailers use the cost of goods sold to reflect production cost. Both manufacturer and retailer add transportation and handling costs per unit to reflect the cost of moving the product to its storage location. C Inventory carrying costs are detailed in the textbook. The primary costs that change when the amount of inventory held changes are: opportunity cost of capital, inventory taxes, inventory insurance. inventory cycle counting, inventory obsolescence, inventory damage, inventory theft and inventory relocation. These costs are usually individually determined and added together to create a single ICC % for the year. Detailed Formula: Annual ICCS [1/2 (order quantity) + safety stocks X [product cost/unit transportation & handling cost/unit] X [ICC%'s added together) For example, suppose a manufacturer ships 5,000 basketballs each month to a warehouse and the warehouse keeps a safety stock of 200 basketballs Assume demand for basketballs by retailers is 5.000 per month. Variable manufacturing cost (i.e., production cost) of basketballs is $6,00 per unit, transport costs from plant to warehouse is $60.000 per year and warehouse handling cost is $30.000 per year. The inventory carrying cost percentage for basketballs this year is 45% Annual ICC 11/2 (5,000) + 2007 X [S6.00/unit +(590.000 - 60,000 basketballs/year)] X 1.45) Annual ICCS 2.700 units X $7.50/urut X 45 59.112.50 Once annual ICCS is calculated, any partial year calculations are determined directly. For example, monthly ICCS - annual ICCS +12 ICC and average inventory in the logistics pipeline are directly related. Most firms track the number of times per year that the average inventory is replaced. This is called Inventory Turnover. For example, if annual sales 60000 units and the warehouse receives 6 shipments of 10000 units that year I shipment every two months), then the warehouse average inventory 1/2 (10000) or 5000 units and this average inventory will tum over 12 times this year. In other words. Inventory Tmover equals 60000/5000 units 12 times Application: 1. Using the detailed formula for ICC and the following information, calculate the annual finished product inventory carrying cost for Apple iPads (put in table, column Y)) Apple stores the tablets that it produces in its only company field warehouse. The warehouse received one tablet shipment cach quarter this year. Each shipment contained 150,000 tablets. The warehouse kept a safety stock of 10,000 tablets. Demand was 150,000 tablets per quarter from retailers. Apple sold the tablets to retailers for $750 cach. Apple's variable manufacturing (1.c., production) costs were $250 per tablet. Apple's fixed manufacturing costs averaged S125 per tablet. The transport cost from plant to warehouse location was $1,000,000 per year. The handling costs to receive and store shipments for the year was $500,000. The costs just described for transportation and handling, when combined, equal $1,500,000 Cost data collected (as a percent of inventory value): 1 Cost of capital borrowed to finance inventory (5%) Opportunity cost of capital (9%) Taking inventory (cycle counting) in warehouse (5%) Warehouse manager salary (12%) Annual warehouse depreciation (8%) State inventory tax (4%) Insurance on inventory (5%) Inventory relocation (1%) Inventory obsolescence cost (2%) Fire damage of warchouse facility (4%) Inventory damage in warehouse (6%) Inventory theft in Warehouse (4%) Calculation: 2. Place the annual ICC and inventory turnover calculated for questions 1 and 2 in the Y column of the table below. Using the data provided in question I and the table below, fill in the rest of the table by calculating annual ICC and inventory turnover for the other two inventory strategies. Show calculations Note: the text in question / uses information for column Y on the next page when you calculate columns X & Zsome of the information used to calculate Annual ICC and Inventory Turns may change, so be careful and read the table! Column X Z 600,000 10,000 600,000 10,000 600,000 10.000 Tablet Sales Units per year Safety Stock Units Shipments per year (of equal size or quantity) Annual Transport Cost Plus Annual Handling Cost 2 4 12 $750,000 S1,500,000 $3,000,000 Annual ICOS (increases, decreases, remains constant) Inventory Turns Principles: As average inventory increases, ICC and as average inventory decreases, ICC If annual sales remains constant... as inventory turnover increases, ICC and as inventory tumover decreases, ICC (increases, decreases, remains constant). (increases. decreases, remains constant) (increases, decreases, remains constant) Annual ICCS = AXBC A-[1/2 (order quantity) + safety stocks] B - [ product cost/unit (transportation & handling costunit) Make sure you are using cost per unit C- [ICC%'s added together) Tip: Sum the crazy cight from list! As a check, 100% should not exceed 40% Y(base scenario described in the case, middle column in above the A-%(OQ of +10000 OO is the amount the warchouse orders and has shipped to them? B $250/tablet + [$1,500,000 per year tablets per year) C % same for all scenarios AXBXC- X (left column) A1 (OQ of >10000 OQ is annual amount divided by shipments per year B-S250/tablet +[(Annual Transport Cost Plus Annual Handling Cost) tablets per year) C % same for all scenarios AXBXC Z right column A%(OQ of +10000) OQ is amount warehouse orders and has shipped to them? B $250/tablet + [(Annual Transport Cost Plus Annual Handling Cost) tablets per year] % same for all scenarios nual Day include safety stock for this calculation Determining A, B & C: A Finished product average inventory = 1/2 order quantity + all safety stock. For example, when a warehouse orders and receives shipments of 10 units every 10 days and ships 1 unit per day to the retail store and carries a safety stock of 2 units, the average inventory is 1/2 (10) + 2 = 7 units. B Product cost increases as it is produced and moved. Manufacturers use variable manufacturing cost per unit and retailers use the cost of goods sold to reflect production cost. Both manufacturer and retailer add transportation and handling costs per unit to reflect the cost of moving the product to its storage location. C Inventory carrying costs are detailed in the textbook. The primary costs that change when the amount of inventory held changes are: opportunity cost of capital, inventory taxes, inventory insurance. inventory cycle counting, inventory obsolescence, inventory damage, inventory theft and inventory relocation. These costs are usually individually determined and added together to create a single ICC % for the year. Detailed Formula: Annual ICCS [1/2 (order quantity) + safety stocks X [product cost/unit transportation & handling cost/unit] X [ICC%'s added together) For example, suppose a manufacturer ships 5,000 basketballs each month to a warehouse and the warehouse keeps a safety stock of 200 basketballs Assume demand for basketballs by retailers is 5.000 per month. Variable manufacturing cost (i.e., production cost) of basketballs is $6,00 per unit, transport costs from plant to warehouse is $60.000 per year and warehouse handling cost is $30.000 per year. The inventory carrying cost percentage for basketballs this year is 45% Annual ICC 11/2 (5,000) + 2007 X [S6.00/unit +(590.000 - 60,000 basketballs/year)] X 1.45) Annual ICCS 2.700 units X $7.50/urut X 45 59.112.50 Once annual ICCS is calculated, any partial year calculations are determined directly. For example, monthly ICCS - annual ICCS +12 ICC and average inventory in the logistics pipeline are directly related. Most firms track the number of times per year that the average inventory is replaced. This is called Inventory Turnover. For example, if annual sales 60000 units and the warehouse receives 6 shipments of 10000 units that year I shipment every two months), then the warehouse average inventory 1/2 (10000) or 5000 units and this average inventory will tum over 12 times this year. In other words. Inventory Tmover equals 60000/5000 units 12 times Application: 1. Using the detailed formula for ICC and the following information, calculate the annual finished product inventory carrying cost for Apple iPads (put in table, column Y)) Apple stores the tablets that it produces in its only company field warehouse. The warehouse received one tablet shipment cach quarter this year. Each shipment contained 150,000 tablets. The warehouse kept a safety stock of 10,000 tablets. Demand was 150,000 tablets per quarter from retailers. Apple sold the tablets to retailers for $750 cach. Apple's variable manufacturing (1.c., production) costs were $250 per tablet. Apple's fixed manufacturing costs averaged S125 per tablet. The transport cost from plant to warehouse location was $1,000,000 per year. The handling costs to receive and store shipments for the year was $500,000. The costs just described for transportation and handling, when combined, equal $1,500,000 Cost data collected (as a percent of inventory value): 1 Cost of capital borrowed to finance inventory (5%) Opportunity cost of capital (9%) Taking inventory (cycle counting) in warehouse (5%) Warehouse manager salary (12%) Annual warehouse depreciation (8%) State inventory tax (4%) Insurance on inventory (5%) Inventory relocation (1%) Inventory obsolescence cost (2%) Fire damage of warchouse facility (4%) Inventory damage in warehouse (6%) Inventory theft in Warehouse (4%) Calculation: 2. Place the annual ICC and inventory turnover calculated for questions 1 and 2 in the Y column of the table below. Using the data provided in question I and the table below, fill in the rest of the table by calculating annual ICC and inventory turnover for the other two inventory strategies. Show calculations Note: the text in question / uses information for column Y on the next page when you calculate columns X & Zsome of the information used to calculate Annual ICC and Inventory Turns may change, so be careful and read the table! Column X Z 600,000 10,000 600,000 10,000 600,000 10.000 Tablet Sales Units per year Safety Stock Units Shipments per year (of equal size or quantity) Annual Transport Cost Plus Annual Handling Cost 2 4 12 $750,000 S1,500,000 $3,000,000 Annual ICOS (increases, decreases, remains constant) Inventory Turns Principles: As average inventory increases, ICC and as average inventory decreases, ICC If annual sales remains constant... as inventory turnover increases, ICC and as inventory tumover decreases, ICC (increases, decreases, remains constant). (increases. decreases, remains constant) (increases, decreases, remains constant) Annual ICCS = AXBC A-[1/2 (order quantity) + safety stocks] B - [ product cost/unit (transportation & handling costunit) Make sure you are using cost per unit C- [ICC%'s added together) Tip: Sum the crazy cight from list! As a check, 100% should not exceed 40% Y(base scenario described in the case, middle column in above the A-%(OQ of +10000 OO is the amount the warchouse orders and has shipped to them? B $250/tablet + [$1,500,000 per year tablets per year) C % same for all scenarios AXBXC- X (left column) A1 (OQ of >10000 OQ is annual amount divided by shipments per year B-S250/tablet +[(Annual Transport Cost Plus Annual Handling Cost) tablets per year) C % same for all scenarios AXBXC Z right column A%(OQ of +10000) OQ is amount warehouse orders and has shipped to them? B $250/tablet + [(Annual Transport Cost Plus Annual Handling Cost) tablets per year] % same for all scenarios nual Day include safety stock for this calculation