The X Company stocks a variety of parts and materials it uses in its manufacturi
ID: 2533102 • Letter: T
Question
The X Company stocks a variety of parts and materials it uses in its manufacturing processes. Recently, as demand for its finished goods has increased, management has had difficulty managing parts inventory; they frequently run out of some crucial parts and seem to have an endless supply of others. In an effort to control inventory more effectively, they would like to classify their inventory of parts according to the ABC approach. Following is a list of selected parts and the annual usage and unit value for each:
Item number
Annual usage (items/year)
Unit cost ($)
Item number
Annual usage (items/year)
Unit cost ($)
1
36
350
16
60
$ 610
2
150
30
17
120
20
3
50
23
18
270
15
4
300
45
19
45
50
5
18
1,900
20
19
3,200
6
500
8
21
910
3
7
710
4
22
12
4,750
8
80
26
23
30
2,710
9
344
28
24
24
1,800
10
67
440
25
870
105
11
510
2
26
244
30
12
682
35
27
750
15
13
95
50
28
45
110
14
10
3
29
46
160
15
820
1
30
165
25
Required: Classify the inventory items according to the ABC approach using dollar value of annual demand. What recommendations would you give The Dynaco Company? (150 words)
Item number
Annual usage (items/year)
Unit cost ($)
Item number
Annual usage (items/year)
Unit cost ($)
1
36
350
16
60
$ 610
2
150
30
17
120
20
3
50
23
18
270
15
4
300
45
19
45
50
5
18
1,900
20
19
3,200
6
500
8
21
910
3
7
710
4
22
12
4,750
8
80
26
23
30
2,710
9
344
28
24
24
1,800
10
67
440
25
870
105
11
510
2
26
244
30
12
682
35
27
750
15
13
95
50
28
45
110
14
10
3
29
46
160
15
820
1
30
165
25
Explanation / Answer
ABC Analysis is a system of selective inventory control whereby the measure of control
over an item of inventory varies with its usage value. It exercises discriminatory control
over different items of stores grouped on the basis of the investment involved. Usually the
items of material are grouped into three categories viz; A,B and C according to their use
value during a period. In other words, the high use value items are controlled more closely
than the items of low use value.
(i) ‘A’ Category of items consists of only a small percentage i. e., about 10% of the
total items of material handled by the stores but require heavy investment i. e.,
about 70% of inventory value, because of their high prices and heavy requirement.
(ii) ‘B’ Category of items comprises of about 20% of the total items of material
handled by stores. The percentage of investment required is about 20% of the
total investment in inventories.
(iii) ‘C’ Category of items does not require much investment. It may be about 10% of
total inventory value but they are nearly 70% of the total items handled by stores.
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