Question

A computer company's yearly inventory cost is 40 percent (which accounts for the cost of capital for financing the inventory, warehouse space, and the cost of obsolescence). Last year, the company had $400 million in inventory and cost of goods sold of $26 billion. What is the company's total inventory cost for the year (in $ million)?

Answer 1

Inventory Costs plays a major role in ascertaining working capital requirements as well structuring cash flow statement.

Explanation:

In the given example,  

inventory cost  40 percent

Inventory Value $400 million

 

Ratio of inventory cos ts to inventory value = Inventory Cost / Inventory Value .

so in the current case it will be  40% x/$400 million

Hence, Inventory Cost 160 Million

Since the cost is fairly on a higher side at 40$ it should try to reduce it which will help in improving its bottom-line.

Company should focus on offering on discounts and promotions and reduce Obsolete Stock.  

It should work on restructuring and organizing warehouse costs by prioritizing inventory based on their movements.  

The procurement team should order in minimum quantities and benchmark reorder point.