Q2.3 (Inventory Cost) A manufacturing company producing medical devices reported
ID: 462112 • Letter: Q
Question
Q2.3 (Inventory Cost) A manufacturing company producing medical devices reported $60,000,000 in sales over the last year. At the end of the same year, the company had $20,000,000 worth of inventory of ready-to-ship devices. a. Assuming that units in inventory are valued (based on COGS) at $1,000 per unit and are sold for $2,000 per unit, how fast does the company turn its inventory? The company uses a 25 percent per year cost of inventory. That is, for the hypothetical case that one unit of $1,000 would sit exactly one year in inventory, the company charges its operations division a $250 inventory cost. b. What—in absolute terms—is the per unit inventory cost for a product that costs $1,000?
Explanation / Answer
a)
The number of units sold = ($60,000,000/year) * (1 unit/$2,000)
= 30,000 units/year
COGS = 30,000 units/year * $1,000/unit
= $30,000,000/year
Inventory = $20,000,000
Flow time = inventory / flow rate
= $20,000,000 / $30,000,000 per year
= 0.6667 Years
b)
% inventory cost per computer = 25% * 0.6667 years
= 16.667%
16.667% * $1,000 = $166.67 per unit
So, $166.67 is the per unit inventory cot for a product that costs $1,000.
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