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CHAPTER5FinancialImpactofInventory©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin5-2SelectedFinancialDataforManufacturers,Wholesalers,andRetailersfor1997($Millions)CompaniesSalesNetProfitsNetProfitsasaTotalAssetsInventoryInvestmentInventoriesasaPercentofSalesPercentofAssetsManufacturersAbbottLaboratories$11,883$2,09418%$12,061$1,28011%Borden,Inc.1,48822115%2,20630214%TheCloroxCompany2,74129811%3,0302127%DresserIndustries,Inc.7,4583184%5,09997219%FordMotorCompany153,6276,9205%279,0975,4682%GeneralElectricCompany90,8408,2039%304,0125,8952%GeneralMills6,0334227%3,86138910%GoodyearTire&RubberCo.13,0655594%9,9171,83519%HarrisCorp.3,9391333%3,78460416%HoneywellCo.8,0284716%6,4111,02816%NCRCorp.6,59870.11%5,2934899%NewellCo.3,2342909%3,94462516%Pfizer,Inc.12,1882,21318%15,3361,77312%SaraLeeCorp.20,011(523)-3%10,9892,88226%XeroxCorp.18,1661,4528%27,7322,79210%WholesalersandRetailersBaxterInternational6,1383005%8,7071,20814%BergenBrunswigCorp.11,661821%2,7071,30948%DaytonHudsonCorp.27,7577513%14,1913,25123%FlemingCompanies,Inc.15,372250.16%3,9241,01926%KmartCorporation32,1832491%13,5586,36747%Nordstrom4,8521864%2,86582629%Sears,Roebuck&Company41,2961,1883%38,7005,04413%SupervaluInc.17,2012311%4,0931,11627%Wal-MartStores,Inc.117,9583,5263%45,38416,49736%Winn-Dixie13,2192042%2,9211,24943%Note:Endinginventoryfiguresareusedforinventoryinvestment.Allfiguresarefor1997.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin5-3CostTrade-offsinMarketingandLogisticsProductOrderprocessingandinformationcostsInventorycarryingcostsPlace/customerservicelevelsOrderprocessingandinformationcostsPriceLotquantitycostsWarehousingcostsTransportationcostsMARKETINGCopyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin5-4ComponentsofInventoryCarryingCosts•Capital•Inventoryservice•Storagespace•InventoryriskCopyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin5-5InventoryPositionsintheManufacturer’sLogisticsSystemFinishedgoodsinventoryinfieldFinishedgoodsinventoryatplantRawmaterialsinventoryIn-processinventoryAssumptions:Aone-timeincrease(decrease)infinishedgoodsinventoryresultsinaone-timeincrease(decrease)inrawmaterialspurchased.Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin5-6NormativeModelofInventoryCarryingCostMethodInventorycarryingcostsInventoryinvestmentInsuranceTaxesObsolescencePilferageStoragespacecostsCapitalcostsInventoryservicecostsInventoryriskcostsPlantwarehousesPublicwarehousesRentedwarehousesCompany-ownedwarehousesDamageRelocationcostsCopyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin5-7AdjustingtheCostofMoneytoFittheMethodofInventoryValuationOneMethodAnothermethodInventoryatfullcostVariablecostis80%offullcostInventoryatvariablecostCostofmoneybeforetaxis30%Costofmoneyassociatedwiththeinventoryinvestment$10,000,000x80%$8,000,000x30%$2,400,000CostofmoneybeforetaxVariablecostis80%offullcostInventoryatfullcostAdjustedcostofmoneyCostofmoneyassociatedwiththeinventoryinvestment30%80%$10,000,000x24%$2,400,000Copyright©2001byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/Irwin5-8StepNoCostCategorySourceExplanationAmount(CurrentStudy)1.CostofMoneyComptrollerThisrepresentsthecostofhavingmoneyinvestedininventoryandthereturnshouldbecomparabletootherinvestmentopportunities.30%pretax2.Averagemonthlyinventoryvaluedatvariablecostsdeliveredtothedistributioncenter1.Standardcostdata--comptroller'sdepartment2.Freightratesandproductspecsarefromdistributionreports3.AveragemonthlyinventoryincasesfromprintoutreceivedfromsalesforecastingOnlywantvariablecostssincefixedcostsgoonregardlessoftheamountofproductmanufacturedandstored--followstepsoutlinedinbodyofreport.$7,800,000valuedatvariablecostdeliveredtotheD.C.(Variablemanufacturedcostequaled70%offullmanufacturedcost.VariablecostFOBtheDCaveraged78%offullmanufacturedcost)3.TaxesThecomptroller'sdepartmentPersonalpropertytaxespaidoninventory$90,948whichequals1.17%4.InsuranceThecomptroller'sdepartmentInsurancerate/$100ofinventory(atvariablecosts)$4,524whichequals0.06%5.Recurringstorage(publicwarehouse)DistributionoperationsThisrepresentstheportionofwarehousingcoststhatarerelatedtothevolumeofinventorystored.$226,654annuallywhichequals2.89%6.Variablestorage(plantwarehouses)TransportationservicesOnlythosecoststhatarevariablewiththeamountofinventorystoredshouldbeincluded.Nil7.ObsolescenceDistributiondepartmentreportsCostofholdingproductinventorybeyonditsusefullife0.80%ofinventory8.ShrinkageDistributiondepartmentreportsRequiresmanagerialjudgmenttodeterminetheportionattributabletoinventorystorage.$100,308whichequals1.29%9.DamageDistributiondepartmentreportsRequiresmanagerialjudgmenttodeterminetheportionattributabletoinventorystorage.10.RelocationcostsNotavailableOnlyrelocationcostsincurredtoavoidobsolescenceshouldbeincluded.Notavailable11.TotalcarryingcostsCalculatethenumbersgeneratedinsteps3,4,5,6,8,9and10asapercentag