MBA 635 project management - Handout #1-1 Inventory Turns

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MBA 635
Handout #1-1
The Process View of an Organization
Problem #1: Home Security Systems, Inc. (HSSI) manufactures home security alarm systems.
HSSI’s yearly inventory cost is 40 percent, which represents the cost of capital for inventory related
costs (e.g. financing costs, storage space, etc.). For the fiscal year ending on December 31, 2013 (FY
2013), HSSI reported $80 thousand in average inventory and $950 thousand cost of goods sold
(COGS).
Question: Based on the above data, what percentage of the cost of a home security alarm system
reflects inventory costs? In other words, what is the per-unit inventory cost?
Solution: To solve the above problem, follow these two steps
Step #1: Calculate the Annual Inventory Turn
Step #2: Calculate the per-unit Inventory Cost
Problem #2: Safety Systems, Inc., which is a much larger competitor of HSSI, also manufactures
home security alarm systems. Safety Systems, Inc. has a yearly inventory cost of 35 percent and
reported the following data for the FY ending on December 31, 2013: Average Inventory = $250
million; COGS = $3,500 million.
Question: What percentage of the cost of a home security alarm system reflects the inventory costs
for Secure Systems, Inc.?
Solution: To solve the above problem, follow these two steps
Step #1: Calculate the Annual Inventory Turn
Step #2: Calculate the per-unit Inventory Cost
Follow-Up Question: From a managerial perspective, which company had a more favorable per-unit
inventory cost for FY 2013? Briefly explain your answer and any other managerial implications.
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