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Formulas to Know: Average Inventory

Formulas to Know: Average Inventory. Month 1 + Month 2 + Month 3 Number of months. Inventory valued at $1,000,000. Product. Product. Product. Product. Product. Product. Product. Product. Sales = $1,000,000. Product. Product. We sell a million dollars worth

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Formulas to Know: Average Inventory

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  1. Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

  2. Inventory valued at $1,000,000 Product Product Product Product Product

  3. Product Product Product Sales = $1,000,000 Product Product We sell a million dollars worth of product out the door…

  4. And replace it with… Product Product Product Product Product Sales = $1 MM

  5. And replace it with… Product Product Product Product New inventory valued at $1,000,000 Product Product Product Product Product Product Sales = $1 MM

  6. Product Product Product Product Inventory valued at $1,000,000 Product Product Product Product Product Product Sales = $1 MM We have turned over our inventory one time.

  7. Net sales_______ = $1,000,000 Average inventory at retail = $1,000,000 = 1 Product Product Product Product Inventory valued at $1,000,000 Product Product Product Product Product Product Sales = $1 MM We have turned over our inventory one time.

  8. Net sales_______ = $1,000,000 Average inventory at retail = $1,000,000 Product Product Product Product Average inventory valued at $1,000,000 Product Product Product Product Product Product Sales = $1 MM However, it is average inventory.

  9. Net sales_______ = $1,000,000 Averageinventory at retail = $1,000,000 Product Product Product Product Product Product Product Average inventory valued at $1,000,000 Product Product Product Product Product Product Product Product Sales = $2 MM

  10. Net sales_______ = $2,000,000 Averageinventory at retail = $1,000,000 = 2 inventory turns Product Product Product Product Product Product Product Average inventory valued at $1,000,000 Product Product Product Product Product Product Product Product Sales = $2 MM

  11. Net sales_______ = $2,000,000 Averageinventory at retail = $ 500,000 Product Product Product Product Product Product Product Average inventory valued at $500,000 Product Product Product Product Product Sales = $2 MM

  12. Net sales_______ = $2,000,000 Averageinventory at retail = $ 500,000 Product Product Product Product Product Product Product Average inventory valued at $500,000 Product Product Product Product Product Sales = $2 MM

  13. Net sales_______ = $2,000,000 Average inventory at retail = $ 500,000 = 4 inventory turns Product Product Product Product Product Product Product Average inventory valued at $500,000 Product Product Product Product Product Sales = $2 MM

  14. Net sales_______ = $2,000,000 Averageinventory at retail = $ 500,000 = 4 inventory turns Product Product Product Product Product Product Product Average inventory valued at $500,000 Product Product Product Product Product Sales = $2 MM We have kept sales levels up, using less average inventory.

  15. PPT 12-6 Gross Margin %, Inventory Turnover, & GMROI for Selected Department in Discount Stores

  16. Inventory Turnover Part Two Logistics and Supply Chain Management

  17. PPT 12-9 Advantages of Rapid Turnover • Increased sales volume • Less risk of obsolescence and markdowns • Money for market opportunities • Decreased operating expenses • Increased asset turnover

  18. PPT 12-10 Disadvantages of Rapid Rate of Turnover • Lowered sales volume. • Increased cost of goods sold. • Increase logistics costs: expanded buying and ordering time.

  19. Inventory Carrying Costs • Capital costs on inventory investment. • Inventory service costs. • Storage space costs. • Inventory risk costs.

  20. Capital Costs on Inventory Investment. • Opportunity cost of capital: rate of return if money were invested elsewhere. • Hurdle rate: minimum rate of return on new investments. --Can we make more money earning interest in marketable securities? --Can we make more money retiring debt, thus eliminating interest charges?

  21. Capital Costs on Inventory Investment -- Cash Value of Inventory • Manufacturers: --Direct costs: fixed/variable determined and only variable costs counted. --Absorption (full costing) fixed overhead is calculated in inventory value. • Wholesalers and retailers: --Replacement cost (plus freight). --Market price if product phased out.

  22. Inventory Service Costs • Taxes --Ad valorem (personal property) taxes. --Vary with size of inventory. • Insurance --Somewhat fixed.

  23. Storage Space Costs • Plant warehouses. Fixed costs (except for variable throughput costs). • Public warehouses. • Rented or leased warehouses. • Company-owned warehouses.

  24. Inventory Risk Costs • Obsolescence costs. • Damage costs. • Shrinkage costs. • Relocations costs (transshipped to another warehouse to avoid obsolescence).

  25. Turnover Affects Inventory Carrying Costs Net sales_______ = $1,000,000 Average inventory at retail = $1,000,000 Turnover = 1

  26. Turnover Affects Inventory Carrying Costs Net sales_______ = $1,000,000 Average inventory at retail = $1,000,000 Turnover = 1 Inventory carrying costs = 30% Inventory carrying costs = $300,000

  27. Turnover Affects Inventory Carrying Costs Net sales_______ = $1,000,000 Average inventory at retail = $ 500,000 Turnover = 2 Inventory carrying costs = 30% Inventory carrying costs = $150,000 Savings = $150,000

  28. Turnover Affects Inventory Carrying Costs

  29. Turnover Affects Inventory Carrying Costs

  30. Turnover Affects Inventory Carrying Costs

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