Question

In: Accounting

You recently recommended new inventory targets for your chilled beverages and dry snacks company, based on...

You recently recommended new inventory targets for your chilled beverages and dry snacks company, based on some super fancy MEIO techniques that you heard about in the class of a brilliant, inspiring, and entertaining lecturer who you later found out was Jack Ryan’s smarter, better looking and dramatically more humble CIA counterpart.

The VP of Supply Chain was thrilled with your thought leadership; but, now she needs to translate those targets into operational and financial impacts. Your analysis resulted in inventory targets expressed as days of forward demand coverage.  

The average COGS per case is $40. 50 cases fit per full pallet. Your recommended target average days of inventory, by product type, is:

  • Snacks: 30 days
  • Beverages: 7 days for Q1; 14 days for Q2 and Q3; 3 days for Q4   

2019 forecasted sales, in COGS ($MM USD);

JAN

FEB

MAR

APR

MAY

JUN

JUL

AUG

SEP

OCT

NOV

DEC

Snacks

9.1

9.3

9.3

9.2

9.2

9.1

12.5

8.5

8.8

9.7

10.4

11.6

Beverages

2.5

2.5

2.9

5.7

5.7

15.2

21.1

17.3

16.1

7.4

3.1

2.2

What is the average annual carrying cost of inventory, assuming a 9% cost of capital? Show your work or intermediate steps.

Solutions

Expert Solution

As the demand is given in COGS $ we take it as it is 1 2 3 4 5 6 7 8 9 10 11 12
Carrying cost of inventory for snacks (30 days' $ COGS) 9.1 9.3 9.3 9.2 9.2 9.1 12.5 8.5 8.8 9.7 10.4 11.6
Carrying cost of inventory for beverage(Q1-COGS/30*7)(Q2-COGS/30*14)&(Q3-COGS/30*3) 0.58 0.58 0.68 2.66 2.66 7.09 9.85 8.07 7.51 0.74 0.31 0.22
Total carrying cost per month 9.68 9.88 9.98 11.86 11.86 16.19 22.35 16.57 16.31 10.44 10.71 11.82
PV F at Jan 1 at 9%/12 COC,ie.0.75% p.m. 0.99256 0.98517 0.97783 0.97055 0.96333 0.95616 0.94904 0.94198 0.93496 0.92800 0.92109 0.91424
PV at 0.75% p.m 9.6112 9.7367 9.7555 11.5108 11.4251 15.4834 21.2079 15.6117 15.2524 9.6884 9.8649 10.8063
NPV at 0.75% p.m 149.9542
Average annual carrying cost at 0.75% p.m. Or 9% p.a. is the NPV 149.95
millions

ekkarill92 answered 1 year ago
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