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21 April, 17:57

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?

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  1. 21 April, 18:19
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    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.
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