Question

A manufacturing company producing medical devices reported $60,000,000 in sales over the last year. At the end of the same year, the company had $20,000,000 worth of inventory of ready-to-ship devices. a. Assuming that units in inventory are valued (based on COGS) at $1,000 per unit and are sold for $2,000 per unit, how fast does the company turn its inventory? b. The company uses a 25% per year cost of inventory. That is, for the hypothetical case that one unit of $1,000 would sit exactly one year in inventory, the company charges its operations division a $250 inventory cost. What – in absolute terms – is the per unit inventory cost for a product that costs $1,000?

Answer 1

Answer:

a) The company turn its inventory at 1.5.

b) Per unit inventory cost for a product that costs $1000 is $166.67.

Explanation:

a) number of units sold = ($60000000/year)*(1 unit/$2000)

                                       = 30000 units/year

COGS = 30000 units/year*$1000/unit

           = $30000000/year

inventory = $20000000

flow time = inventory/flow rate

                = $20000000/30000000 per year

                = 0.67 years

inventory turns = 1/flow rate

                          = 1/(0.67)

                           = 1.5

Therefore, The company turn its inventory at 1.5.

b) %inventory cost per computer = 25%*0.6667 years

                                                       = 16.667%

16.667%*$1000 = $166.67 per unit

Therefore, Per unit inventory cost for a product that costs $1000 is $166.67.