Question

0. Assume Dell's annual inventory holding cost is 40% to account for the cost of capital for financing the inventory, the warehouse space, and the cost of obsolescence. In 2001, Dell's 10-K reports showed that the company had $400 million in inventory and COGS of $26,442 million.

   a) What is the per-unit inventory cost of Dell?
   b) What Dell has to pay for holding a laptop that is worth $1000 in cost value?

Answer 1

(a) Per unit inventory cost:

Here, we need to calculate inventory turns.

According to the data, COGS = $26,442 million

Inventory = $400 million

Annual inventory cost = 40% per year

So,

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(b) Dell has to pay for holding a laptop that is worth $1000:

40% is the annual inventory cost to account for the cost of capital, which means Dell has to bear $40 for the component of $100.

If the cost is 1000, Dell has to pay 40% of 1000 = 0.40*1000 = $400

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