Q2.10 (McDonald’s) The following figures are taken from the 2003 financial state

Question

Q2.10 (McDonald’s) The following figures are taken from the 2003 financial statements of McDonald’s and Wendy’s. Figures are in million dollars. McDonald’s Wendy’s Inventory $ 129.4 $ 54.4 Revenue 17,140.5 3,148.9 Cost of goods sold 11,943.7 1,634.6 Gross profit 5,196.8 1,514.4 a. In 2003, what were McDonald’s inventory turns? What were Wendy’s inventory turns? b. Suppose it costs both McDonald’s and Wendy’s $3 (COGS) per their value meal offerings, each sold at the same price of $4. Assume that the cost of inventory for both companies is 30 percent a year. Approximately how much does McDonald’s save in inventory cost per value meal compared to that of Wendy’s? You may assume the inventory turns are independent of the price. Cachon, Gerard; Terwiesch, Christian. Matching Supply with Demand: An Introduction to Operations Management (Page 31). McGraw-Hill Education. Kindle Edition.

Explanation / Answer

a). Inventory turns = COGS / Inventory.

McDonald's Inventory Turns = 11943.7/129.4 = 92.30

Wendy's Inventory Turns = 1634.6/54.4 = 30.05

b). Inventory cost per value meal = Value meal cost * Annual Carrying Rate / Inventory Turns

Annual Carrying Rate = 30%

McDonald's Inventory cost per value meal = 3 * 30% / 92.30 = 0.00975

Wendy's Inventory Turns = 3 * 30% / 30.05 = 0.02995

Inventory Cost per value meal saved by McDonald's as compared to Wendy's = 0.029952 - 0.009751 = $ 0.02020

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