# BU1283-Inventory ManagementAssignment-1Raj Deepak Patel074834

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Northern College of Applied Arts and Technology Assignment - 1 Raj Deepak Patel (202103109) BU1283 - Inventory Management Professor Ashley Wojtus February 6 th , 2022
1. If the cost of manufacturing (direct material and direct labour) is 70% of sales and profit is 13% of sales, what would be the improvement in profit if, through better planning and control, the cost of manufacturing was reduced from 70% of sales to 60% of sales? Solution: Here we are considering Sales as 100% Here, cost of manufacturing = Direct Material + Direct Labour) Given Data: Cost of Manufacturing (Before improvements) = 70% Cost of Manufacturing (After improvements) = 60% Profit in % (Before improvements) = 13% Profit = Sales - (Cost of Manufacturing + Overhead) 13 = 100 - (70 + Overhead) Therefore, Overhead = 100 - ( 70 + 13 ) = 17% The improvement in profit if, through better planning and control, manufacturing cost reduced from 70% to 60% New Gross Profit = Sales Profit - Improved Cost of Manufacturing = 100 - (60 + 17) New Gross Profit = 23% Therefore, Net Improvement Profit = ((New Gross Profit - Old Revenue) ÷ Old Revenue) × 100 = ((23% - 13%) ÷ 13%) × 100 = (10% ÷ 13%) × 100 Net Improvement in Profit = 76.92% Hence, Gross Profit jumped from 17% to 23% by reducing the cost of manufacturing which says that the Gross Profit has been increased by 76.92% 2. In problem 1, how much would sales have to increase to provide the same increase in profits? Solution: Here, Cost of Manufacturing = (Direct Material + Direct Labour) Data: Cost of Manufacturing = 70% Overhead = 17% Profit in % = 23% Profit = Sales - (Cost of Manufacturing + Overhead) 0.23 = Sales - (0.70 Sales +0.17) 0.23 = Sales - 0.70 Sales - 0.17 0.23+0.17 = Sales (1 - 0.70) 0.40 = 0.3 Sales Sales = 0.4 ÷ 0.3
Sales = 1.33% Therefore, 33% sales have to increase to provide the same increase in the profits. 3. On the average, a company has a work-in-process lead time of 12 weeks and an annual cost of goods sold of \$25 million. Assuming that the company works 50 weeks a year: a) What is the dollar value of the work-in-process? b) If the lead time could be reduced to 9 weeks and the annual cost of carrying inventory was 18% of the work-in-process inventory value, what would be the annual savings? Solution: Given Data: Work-in=process = 12 Weeks Annual Cost of Goods sold = \$25 million Working Weeks = 50 a) Cost of goods sold per week = \$25,000,000/year ÷ 50 weeks/year = \$500,000 per week WIP value at 12 weeks lead time = 12 × \$500,000/week = \$6,000,000 b) WIP value at 9 weeks lead time = 9 weeks x \$ 500,000/week = \$4,500,000 Reduction in WIP = \$6,600,000 - \$4,500,000 = \$1,500,000 Annual Savings = \$1,500,000 × (18 ÷ 100) = \$270,000 Hence, the annual savings of the firm will be \$270,000 4. If the opening inventory is 700 units, demand is 1250 units, and production is 900 units, what will be the ending inventory? Solution: Given Data: Opening Inventory = 700 units Demand (Total Forecast) = 1250 units Back orders = 0 Total Production = 900 units As, Total Production = Demand + Back orders + Ending Inventory - Opening Inventory Ending Inventory = (Total Production + Opening Inventory) - (Demand + Back orders) = (900 + 700) - (1250+0) = 1600 - 1250