TOTAL INVENTORY COST: The formula used to solve this problem is \"Little\'s Law\
ID: 373349 • Letter: T
Question
TOTAL INVENTORY COST:
The formula used to solve this problem is "Little's Law". Which states that,
Inventory = Flow Time * Flow Rate
Flow Time = Inventory / Flow Rate
Inventory = $400 million
Flow Rate = $26 billion / year = $26000 million / year
Flow Time = 400 / 26000
Flow Time = 400 million dollars / (26000 million dollars / years)
Flow Time = 0.01538 Years
Annual Inventory Cost (in terms of % of cost of goods sold) = Inventory Cost percentage * Flow Time
Annual Inventory Cost = 40% * 0.01538
Annual Inventory Cost = 0.6154%
This Annual Inventory Cost is in terms of % of cost of goods sold.
To find the Total Inventory Cost,
Total Inventory Cost = Annual Inventory cost % * Cost of goods sold.
Total Inventory Cost = 0.6154 % * 26000
Total Inventory Cost = 0.006154 * 26000
Total Inventory Cost = $160 million.
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Explanation / Answer
A computer company's yearly inventory cost is 40% which accounts for the cost of capital for financing the inventory, warehouse space, and the cost of obsolescence). Last year the company averaged $400 million in inventory and the cost of goods sold was $26 billion What is the company's total inventory cost for the year (in million $s)? million
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