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ASSIGNMENT (1)

CHAPTER 1 AND CHAPTER 2

COURSE- INVENTORY MANAGEMENT

SUBMITTED TO- ASHLEY WOJTUS

SUBMITTED BY- ROBIN SINGH (202004705)

DATE- FEBRUARY 06, 2022

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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?

Answer – Before improvement –

Total sale = 100 %

Direct material and labour – 70%

Profit = 13%

Other (overhead) = 100% – (70%+13%) = 100% - 83% = 17%

Goods sold = 70% + 17% = 87%

Profit = 13%

Goods sold / profit = 87% / 13%

After improvement -

Manufacturing cost reduced from 70% to 60% of sale

So, Manufacturing cost = 60 %

total cost = 100 %

overhead = 17 %

profit = 100% – 60% – 17% = 23%

Before improvement profit was 13 % and after improvement it reaches at 23%. So,

profit is increased by 76.92% after the improvement.

2. In problem 1, how much would sales have to increase to provide the same increase in

profits?

Answer– Before After

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Revenue = 100% 100%

Manufacturing = 70% 60%

Overhead = 17% 17%

Profit = 13% 23%

Profit = sales – (Manufacturing + overhead)

23%/100 = Sales – (70%/100 + 17%/100)

0.23 = Sales – (0.70 + 0.17)

0.23 = sales – 0.87

0.23+0.87 = Sales

Sales = 1.10

Sale must increase 10% to give the same increase on profit.

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?

Answer – Total annual cost of goods = $25 million (25,000,000)

Total week company work in a year = 50 week

Each week cost = total annual cost / weeks

= $25,000,000 / 50 =$ 500,000 (Half Million) / week

Work in process at 12 week = $500,000 X 12 = $6,000,000

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?
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Answer - Work in process at 9 week = $500,000 X 9 = $4,500,000

Reduction in WIP (12 weeks – 9 weeks) = $6,000,000 – $4,500,000

=$1,500,000

Annual Saving at 18 % = $1,500,000 X 18% = $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?

Answer – Opening inventory = 700 units

Demand = 1250 units

Production = 900 units

Formula = Ending inventory = opening inventory + production – demand

Ending inventory = 700 + 900 – 1250

= 1600 – 1250 = 350 units

So, 350 units will be the ending inventory.

5. A company wants to produce 35,000 units in a 4-month period. The months have 22, 21,

20, and 21 working days, respectively. What should the average daily production be?

Answer – Total target = 3500

Month Total working Days

1 22

2 21

3 20

4 21
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Total 84

Formula = Production / Period (working days)

= 35000 / 84

= 416.66 units produce per day.

So, company should produce 416.66 units on daily basis.

6. In problem 5, how much will be produced in each of the four months?

Answer – On daily basis = 416.66 units produce

Total days of first four months = 22+21+20+21 = 84 days

Formula = average production X period

= 416.66 X 84 = 34,999.44 units

So, in four months company will produce 34,999.44 units.

7. Demand for bicycle helmets is expected to be 12,000, 15,000, 14,000, 8,000, and 5,000

for the next 5 months. Create a table showing a 5-month production plan for using a

chase strategy.

Answer -

Month Demand (Forecast) Production Plan

1 12000 10800

2 15000 10800

3 14000 10800

4 8000 10800

5 5000 10800

Total 54000 54000

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Formula = Total Demand / Period

= 54000 / 5

= 10800

So, company will produce 10800 bicycle helmets in each month for completing

expected demand.

8. A production line is to run at 1300 units per month. Sales are forecast as shown in the

following. Calculate the expected period-end inventory. The opening inventory is 700

units. All periods have the same number of working days.

Period 1 2 3 4 5 6

Forecast 900 1100 875 1450 1375 1200

Planned Production 1300 1300 1300 1300 1300 1300

Planned 700

Inventory

Answer – Production per month = 1300 units

Opening inventory = 700

Formula = Ending Inventory = Beginning inventory + production – demand

=1st month = 700 + 1300 – 900 = 1100

Period Forecast Planned Production Planned inventory 700

1 900 1300 700+1300-900=1100

2 1100 1300 1100+1300-1100= 1300

3 875 1300 1300+1300-875=1725

4 1450 1300 1725+1300-1450=1575

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5 1375 1300 1575+1300-1375=1500

6 1200 1300 1500+1300-1200=1600

Total 6900 7800

So, ending inventory is 1600 units.

9. A company wants to develop a level production plan for a family of products. The

opening inventory is 100 units. The demand for each of the periods is given in what

follows. All periods have the same number of working days.

Period 1 2 3 4 5 6 Total

Forecast 875 1100 1220 835 1050 980

Demand

Planned

Production

Planned

Inventory

A) How much should the company produce each period?

Answer – Formula = Total Forecast Demand / period

= 6060 / 6 = 1010 Units per period

Period Forecast Demand Planned productions

1 875 1010

2 1100 1010

3 1220 1010

4 835 1010
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5 1050 1010

6 980 1010

Total 6060 6060

B) What will be the ending inventories in each period?

Answer – Opening Inventory = 100 units

Planned Production = 1010 each period

Ending inventory = beginning inventory + Production – demand

1st period = 100 + 1010 – 875 = 235 Units

Period Forecast Demand Planned production Planned Inventory 100

1 875 1010 100+1010-875 = 235 units

2 1100 1010 235+1010-1100= 145 units

3 1220 1010 145+1010-1220= -65 units

4 835 1010 -65+1010-835=110 units

5 1050 1010 110+1010-1050=70 units

6 980 1010 70+1010-980= 100 units

Total 6060 6060

C) Do you see any problems with the plan?

Answer – Yes, there is one problem in the 3 rd period. There forecast demand is 1220 and

Planned production is 1010 units so if we join the planned inventory and planned

Production (145+1010=1155) where as demand forecast is higher 65 units (1220units) against

the production (1155).

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D) If it cost of carrying inventory is $2.50 per unit per period based on ending inventory,

what is the total cost of carrying inventory?

Answer -

Period Ending Inventory Cost per unit Total Cost in dollar

1 235 2.50$ 235X2.50=587.50

2 145 2.50$ 145 X2.50 = 362.50

3 -65 2.50$ -65 X 2.50 = -162.50

4 110 2.50$ 110 X2.50=275

5 70 2.50$ 70 X2.50=175

6 100 2.50$ 100 X2.50=250

Total Total Cost = 1487.50

So, total cost of carrying inventory is 1487.50$.

10. Because of its labour contract, a company must hire enough labour for 100 units of

production per week on one shift or 200 units per week on two shifts. It cannot hire, lay

off, or assign overtime. During the fourth week, workers will be available from another

department to work all or part of an extra shift (up to 100 units). There is a planned

shutdown for maintenance in the second week, which will cut production to half.

Develop a production plan. The opening inventory is 200 units, and the desired ending

inventory is 300units.

Week 1 2 3 4 5 6 Tota

Forecast Demand 120 160 240 240 160 160

Planned Production
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Planned

Inventory

Answer – Opening production = 200 units

Ending inventory = 300 units

Forecast demand = (120+160+240+240+160+160) =1080

Total production formula = ending inventory + total forecast demand – opening

inventory

Total production = 300+1080-200 = 1180

Maximum production each week = 200 in two shift

while, in second week the production will cut for half so total week is 6 and

Deduct half week. 6-0.5 = 5.5 weeks

Each week production is 200 units so 200 X 5.5 = 1100 units will produce in

5.5 weeks.

In forth week, shift worker from other department for extra shift

1180 – 1100 = 80 units (this is the extra units produce in fourth week)

Plan production –

Week 1 – 200 units

Week 2 – 100 units (because half shift shut down for maintenance)

Week 3 – 200 units

Week 4 – 200+80 = 280 units (80 units extra produce with extra labour)

Week 5 – 200 units

Week 6 – 200 units

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Planned inventory = opening inventory + planned production – demand

1st week Planned inventory = 200 + 200 – 120 = 280

Week Forecast Planned production Planned Inventory 200 units

demand

1 120 200 200+200-120= 280

2 160 100 280+100-160= 220

3 240 200 220+200-240= 180

4 240 280 180+280-240= 220

5 160 200 220+200-160= 260

6 160 200 260+200-160= 300

Total 1080 1180

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Reference

 https://www.chegg.com/homework-help/questions-and-answers/level-strategy-formulas-

production-required-total-demand-beginning-inventory-minimum-produ-q27084916

https://www.chegg.com/homework-help/questions-and-answers/level-strategy-formulas-

production-required-total-demand-beginning-inventory-minimum-produ-q27084916.(n.d.).

Retrieved February 5, 2022.