Chapter 11, Problem 6P

a)

Summary Introduction

To determine: Weeks of supply for Company A.

Introduction: Supply chain management is one of the important elements of a business which impacts business product development. With expanding business in global conditions, supply chain activities can impact on the cost effectiveness of the business.

Answer to Problem 6P

Weeks of supply for Company A is 3.85.

Explanation of Solution

Given information:

	Company A
Net revenue	$16,500.00
Cost of sales	$13,500.00
Inventory	$1,000.00
Total assets	$8,600.00

Formula to calculate week of supply:

$\text{Week of supply}=\frac{\text{Inventory}}{\text{Sales}\text{per}\text{week}}$

Calculation of week of supply:

Sale per week is calculated by dividing the annual sales with the number of weeks in a year. Annual sales $13,500 is divided with 52 which give $259.60.

$\begin{array}{c}\text{weeks}\text{of}\text{supply}=\frac{\text{\$1,000}}{\text{\$259}\text{.60}}\\ =\text{3}\text{.85}\end{array}$

Week of supply is calculated by dividing inventory with sales per week. The inventory $1,000 is divided with $259.60 yields 3.85 as weeks of supply for company A.

Hence, weeks of supply for Company A is 3.85.

b)

Summary Introduction

To determine: Percentage of assets committed to inventory in Company A.

Answer to Problem 6P

Answer: 11.63% of total assets of Company A is committed to inventory.

Explanation of Solution

Given information:

	Company A
Net revenue	$16,500.00
Cost of sales	$13,500.00
Inventory	$1,000.00
Total assets	$8,600.00

Formula to inventory investment:

$\text{Inventory}\text{investment}=\frac{\text{Inventory}}{\text{Total}\text{assets}}$

Calculation of inventory investment:

$\begin{array}{c}\text{Inventory investment}=\frac{\text{\$1,000}}{\$8,600}\\ =0.1163\\ =11.63\%\end{array}$

Percentage of assets committed to inventory can be calculated by computing inventory investment. Inventory investment is calculated by dividing inventory with the total assets. The inventory $1,000 is divided with total assets $8,600 which yields 11.63% of assets of Company A is committed to inventory.

Hence, 11.63% of total assets of Company A are committed to inventory.

c)

Summary Introduction

To determine: Inventory turnover of Company A.

Answer to Problem 6P

The turnover of Company B is 13.5.

Explanation of Solution

Given information:

	Company A
Net revenue	$16,500.00
Cost of sales	$13,500.00
Inventory	$1,000.00
Total assets	$8,600.00

Formula to calculate turnover:

$\text{Turnover}=\frac{\text{Cost}\text{of}\text{sales}}{\text{Inventory}}$

Calculation of turnover:

$\begin{array}{c}\text{Turnover}=\frac{\text{\$13,500}}{\$1,000}\\ =13.5\end{array}$

The turnover is calculated by dividing cost of sales with inventory. The cost of sales $13,500 is divided with inventory $1,000 which yields turnover of 13.5 for company A.

Hence, the turnover of Company A is 13.5.

d)

Summary Introduction

To Compare: Performance of Company A with industry leaders.

Answer to Problem 6P

Company A needs to improve its performance.

Explanation of Solution

Given information:

	Company A	Company B
Net revenue	$16,500.00	$27,500.00
Cost of sales	$13,500.00	$21,500.00
Inventory	$1,000.00	$1,250.00
Total assets	$8,600.00	$16,600.00

Formula:

$\begin{array}{c}\text{Turnover}=\frac{\text{Cost}\text{of}\text{sales}}{\text{Inventory}}\\ \text{Inventory}\text{investment}=\frac{\text{Inventory}}{\text{Total}\text{assets}}\end{array}$

Comparison calculation of turnover and inventory investment:

	Company A	Company B
Net revenue	$16,500.00	$27,500.00
Cost of sales	$13,500.00	$21,500.00
Inventory	$1,000.00	$1,250.00
Total assets	$8,600.00	$16,600.00
Turn over	13.5	17.2
Inventory investment	11.63%	7.53%

From the above calculation of turnover and inventory investment it can be inferred that Company A has a turnover of 13.5 when the turnover of Company B is 17.2. The inventory investment of Company A is 11.63% when the Company B has 7.53%.

In both the aspects, Company B is far ahead of Company A. So, the performance of Company A has to be better and the management team must look into the aspects to improve the performance.

Hence, Company A needs to improve its performance.