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

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/307)(Q2-COGS/3014)&(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 11 months ago

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