Question

Q7: There are two retail stores – both of them have sales of $ 200000 annually and annual cost of goods sold is $150000 in each of the stores. Labor and other expenses are $10000 annually in each of the two stores. The only difference between the two stores is that the normal inventory or stock of goods in Store A is $800000, while the normal inventory or stock of goods in store B is $400000. Estimate the difference in profitability of the two stores.

Q 8: A company manufactures TV sets at a cost of $300 each. After manufacturing it finds that it requires to maintain an average inventory of about 800 TV sets that are in either warehouses or in transit in transportation. Thereafter, when the sets are sold to retailers the terms of selling are “payment may be made in 60 days”. If production is 1000 TV sets in a month, estimate the additional interest costs because of holding inventories as well as extending credit in the market (with retailers making payments after two months in keeping with the terms of sale).

Rate of Interest: Where you may like to use a rate of interest or rate of discount use 10% as an annual rate of interest or discount.

Answer 1

Q7: Estimate difference in profitability of two stores.

	A	B
Sales	200000	200000
Less :Cost of goods sold	150000	150000
Labour and other expenses	10000	10000
Inventory holding cost @ 10% p.a of inventory	80000	40000
Profit or (Loss)	(40000)	0

In the above statement we can see that both stores A and B have same amount of sales and other expenses. The inventory or stock of stores made a clear difference in the profitability. Store A have $800000 of inventory which costs them $80000 of inventory holding cost and as a result store ended up with a loss of $40000. Store B on the same time had an inventory of $400000 with a holding cost of $40000 and the store ended up in breakeven that is, no profit or loss. Even both the stores had same amount of sales and expenses, the level of holding inventory made a huge difference in profit.

Note: Inventory holding cost assumed as 10%

Q8: Estimate the additional interest costs because of holding inventories as well as extending credit in the market.

Production units - 1000 units

Average inventory - 800 units

Sales - 200 units

Cost of tv set- $300

Interest rate - 10%

Cost of holding inventory = Average inventory * holding cost

= (800*300)*10%

= $48000

Interest cost of credit sale= cost of goods sold * Interest rate

=((200*300)*10%)*2/12

=$1000

Note: Sales calculated as 200 units(total production - average inventory required).