formulas to know: average inventory month 1 + month 2 + month 3 number of months

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

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

Formulas to Know: Average Inventory

Month 1 + Month 2 + Month 3

Number of months

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

Product

Inventory valued at$1,000,000

ProductProduct

ProductProduct

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

ProductProduct

ProductProduct

Product Sales = $1,000,000

We sell a million dollars worth of product out the door…

Page 4: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

ProductProduct

Product

ProductProduct

And replace itwith…

Sales = $1 MM

Page 5: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

Product

New inventory valued at$1,000,000

Product

Product

ProductProduct

ProductProduct

ProductProduct

Product

And replace itwith…

Sales = $1 MM

Page 6: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

Product

Inventory valued at$1,000,000

Product

Product

ProductProduct

ProductProduct

ProductProduct

Product

We have turned over our inventoryone time.

Sales = $1 MM

Page 7: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

Product

Inventory valued at$1,000,000

Product

Product

ProductProduct

ProductProduct

ProductProduct

Product

We have turned over our inventoryone time.

Net sales_______ = $1,000,000Average inventory at retail = $1,000,000

= 1

Sales = $1 MM

Page 8: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

Product

Averageinventory valued at$1,000,000

Product

Product

ProductProduct

ProductProduct

ProductProduct

Product

Net sales_______ = $1,000,000Average inventory at retail = $1,000,000

Sales = $1 MM

However, it is average inventory.

Page 9: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

ProductProduct

Product

ProductProduct

ProductProduct

ProductProduct

Product

ProductProduct

Product

Product Product

Sales = $2 MM

Averageinventory valued at$1,000,000

Net sales_______ = $1,000,000Average inventory at retail = $1,000,000

Page 10: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

ProductProduct

Product

ProductProduct

ProductProduct

ProductProduct

Product

Net sales_______ = $2,000,000Average inventory at retail = $1,000,000

= 2 inventory

turns

ProductProduct

Product

Product Product

Sales = $2 MM

Averageinventory valued at$1,000,000

Page 11: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

ProductProduct

Product

ProductProduct

ProductProduct

Net sales_______ = $2,000,000Average inventory at retail = $ 500,000

ProductProduct

Product

Product Product

Sales = $2 MM

Averageinventory valued at$500,000

Page 12: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

ProductProduct

Product

ProductProduct

ProductProduct

Net sales_______ = $2,000,000Average inventory at retail = $ 500,000

ProductProduct

Product

Product Product

Sales = $2 MM

Averageinventory valued at$500,000

Page 13: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

ProductProduct

Product

ProductProduct

ProductProduct

Net sales_______ = $2,000,000Average inventory at retail = $ 500,000

= 4 inventory

turns

ProductProduct

Product

Product Product

Sales = $2 MM

Averageinventory valued at$500,000

Page 14: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

ProductProduct

Product

ProductProduct

ProductProduct

Net sales_______ = $2,000,000Average inventory at retail = $ 500,000

= 4 inventory

turns

ProductProduct

Product

Product Product

Sales = $2 MM

Averageinventory valued at$500,000

We have kept sales levels up, using lessaverage inventory.

Page 15: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

PPT 12-6 Gross Margin %, Inventory Turnover, & GMROI for Selected Department

in Discount Stores

Page 16: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

Inventory Turnover Part Two

Logistics and Supply Chain Management

Page 17: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

Advantages of Rapid Turnover

• Increased sales volume

• Less risk of obsolescence and markdowns

• Money for market opportunities

• Decreased operating expenses

• Increased asset turnover

PPT 12-9

Page 18: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

Disadvantages of Rapid Rate of Turnover

• Lowered sales volume.

• Increased cost of goods sold.• Increase logistics costs: expanded buying and

ordering time.

PPT 12-10

Page 19: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

Inventory Carrying Costs

• Capital costs on inventory investment.

• Inventory service costs.

• Storage space costs.

• Inventory risk costs.

Page 20: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

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?

Page 21: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

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.

Page 22: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

Inventory Service Costs

• Taxes

--Ad valorem (personal property) taxes.

--Vary with size of inventory.

• Insurance

--Somewhat fixed.

Page 23: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

Storage Space Costs

• Plant warehouses. Fixed costs (except for variable throughput costs).

• Public warehouses.

• Rented or leased warehouses.

• Company-owned warehouses.

Page 24: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

Inventory Risk Costs

• Obsolescence costs.

• Damage costs.

• Shrinkage costs.

• Relocations costs (transshipped to another warehouse to avoid obsolescence).

Page 25: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

Turnover Affects Inventory Carrying Costs

Net sales_______ = $1,000,000

Average inventory at retail = $1,000,000

Turnover = 1

Page 26: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

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

Page 27: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

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

Page 28: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

Turnover Affects Inventory Carrying Costs

Inventory turns

Average inventory

30% carry cost

Carry cost savings (from

$ previous cost)

1 $1,000,000 $300,000 -0-

2 $500,000 $150,000 $150,000

3 $333,333 $100,000 $100,000

4 $250,000 $75,000 $25,000

Page 29: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

Turnover Affects Inventory Carrying Costs

Inventory turns

Average inventory

30% carry cost

Carry cost savings (from

$ previous cost)

1 $1,000,000 $300,000 -0-

2 $500,000 $150,000 $150,000

3 $333,333 $100,000 $100,000

4 $250,000 $75,000 $25,000

Page 30: Formulas to Know: Average Inventory Month 1 + Month 2 + Month 3 Number of months

Turnover Affects Inventory Carrying Costs

Inventory turns

Average inventory

30% carry cost

Carry cost savings (from

$ previous cost)

10 $100,000 $30,000 3,333

11 $ 90,909 $27,273 $2,727

12 $83,333 $25,000 $2273

13 $76,923 $23,077 $1,923