Question

In: Operations Management

A small toy store has organized its 10 inventory items on an annual dollar-volume basis. The...

A small toy store has organized its 10 inventory items on an annual dollar-volume basis. The information below shows the items, their annual demands, and unit costs. How should the store classify these items into groups A, B, and C?

Item Number       Annual Volume (Units)         Unit Cost ($)

Item 1                                   300                                    $10

Item 2                                 1000                                    $30

Item 3                                   500                                    $60

Item 4                                   100                                      $2

Item 5                                 1500                                    $20

Item 6                                   600                                    $50

Item 7                                 2000                                 $1.50

Item 8                                   900                                    $70

Item 9                                 1200                                 $2.00

Item 10                                 700                                    $40

Please use the Excel Solver to solve the above exercise question

Solutions

Expert Solution

Step-1: Multiply the Annual Volume (Units) and the Unit Cost ($) to get the Annual Usage in $

Item Number Annual Volume (Units) Unit Cost ($) Annual usage in $
Item 1 300 $10.0 $3,000.0
Item 2 1000 $30.0 $30,000.0
Item 3 500 $60.0 $30,000.0
Item 4 100 $2.0 $200.0
Item 5 1500 $20.0 $30,000.0
Item 6 600 $50.0 $30,000.0
Item 7 2000 $1.5 $3,000.0
Item 8 900 $70.0 $63,000.0
Item 9 1200 $2.0 $2,400.0
Item 10 700 $40.0 $28,000.0

Calculations:

Step-2: Sort the items as per the ascending order of Annual Usage in $

Output:

Item Number Annual Volume (Units) Unit Cost ($) Annual usage in $
Item 8 900 $70.0 $63,000.0
Item 2 1000 $30.0 $30,000.0
Item 3 500 $60.0 $30,000.0
Item 5 1500 $20.0 $30,000.0
Item 6 600 $50.0 $30,000.0
Item 10 700 $40.0 $28,000.0
Item 1 300 $10.0 $3,000.0
Item 7 2000 $1.5 $3,000.0
Item 9 1200 $2.0 $2,400.0
Item 4 100 $2.0 $200.0

Step-3: Compute the percentage of dollar usage as follows:

Item Number Annual Volume (Units) Unit Cost ($) Annual usage in $ Percent of dollar usage
Item 8 900 $70.0 $63,000 28.7%
Item 2 1000 $30.0 $30,000 13.7%
Item 3 500 $60.0 $30,000 13.7%
Item 5 1500 $20.0 $30,000 13.7%
Item 6 600 $50.0 $30,000 13.7%
Item 10 700 $40.0 $28,000 12.8%
Item 1 300 $10.0 $3,000 1.4%
Item 7 2000 $1.5 $3,000 1.4%
Item 9 1200 $2.0 $2,400 1.1%
Item 4 100 $2.0 $200 0.1%
Total $219,600 100%

Calculations:

Step-4: Assign A, B, and C class, We have used the following scheme.

  • A: 30% of items (i.e. 3 items) with the top 56% contribution
  • B: 40% of items (i.e. next 4 items) with the next 40% contribution
  • C: 30% of items (i.e. next 3 items) with the rest 4% contribution

However, you can choose your own scheme.

Item Number Annual Volume (Units) Unit Cost ($) Annual usage in $ Percent of dollar usage Category
Item 8 900 $70.0 $63,000 28.7% A
Item 2 1000 $30.0 $30,000 13.7% A
Item 3 500 $60.0 $30,000 13.7% A
Item 5 1500 $20.0 $30,000 13.7% B
Item 6 600 $50.0 $30,000 13.7% B
Item 10 700 $40.0 $28,000 12.8% B
Item 1 300 $10.0 $3,000 1.4% C
Item 7 2000 $1.5 $3,000 1.4% C
Item 9 1200 $2.0 $2,400 1.1% C
Item 4 100 $2.0 $200 0.1% C
Total $219,600 100%

keosha answered 2 years ago
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