1. A manufacturing company producing medical devices reported $60 mill in sales over the last year. At the end of the same year, the company had $20 mill worth of inventory of ready-to-ship devices.
a. Assuming that units in inventory are valued at $1,000 per unit and are sold for $2,000 per unit, how fast does the company turns its inventory? The company uses a 25 percent per year cost of inventory.
b. What in absolute terms is the unit inventory cost for a product that costs $1,000?
Answers
Answer:
Sales
$60,000,000
(Flow)
Inventory
$20,000,000
Part A
Selling Price
$2,000
COGS per Unit
$1,000
(Flow Rate)
Units Sold
30,000
Total COGS
$30,000,000
(Flow Rate)
Flow Time (in years)=Inventory/Flow rate
0.666667
Inventory Turns
1.5
Part B
Per-Unit Inventory Cost Percentage
16.66667
Per-Unit Inventory Cost (in $)
166.6667
Applying Little’s Law to Financials allows us to see how efficient organization is.
In this particular problem we're concerned with the process so that the average inflow ( going into the process ) and the average outflow (coming out of the process). How long does it take for a dollar to get through the entire process how many dollars are sitting in inventory and how many dollars go through the entire process in a period of time