Borgki Enterprises has the following 10 items in inventory. Theodore Borgki asks
ID: 360330 • Letter: B
Question
Borgki Enterprises has the following 10 items in inventory. Theodore Borgki asks you, a recent OM graduate, to divide these items into ABC classifications. Item Annual Demand Cost/Unit Annual Cost Percent A2 2000 50 B8 4000 280 C7 1500 42 D1 6000 65 E9 1000 12 F3 500 450 G2 300 800 H2 600 35 I5 2600 200 J8 2500 40 Total ……………………….. .. ..……………. a) Develop an ABC classification system for the 10 items. b) How can Borgki use this information? c) Borgki reviews the classification and then places item D1 into the category _______ Why might he do so?
Explanation / Answer
Answer to question a :
We will follow following method to arrive at A/B/C/ classifications
Calculate for each item “Annual cost” = Annual demand X Cost / unit
= Annual cost / Sum of annual costs x 100
We will be following below rules for deciding on A/B/C classification :
All items with cumulative percentage annual cost ( %) upto and around 80% will be classified under “Class A” item
All items with cumulative percentage annual cost ( %) more than 80% and upto and around 90% will be classified as B class items
All items with cumulative percentage annual cost ( %) more than 90% and upto 100 % will be classified as C class items
The filled up table as follows :
Item
Annual demand
Cost/ unit
Annual cost
Percentage of annual cost (%)
Cumulative percentage
B8
4000
280
1120000
40.13
40.13
I5
2600
200
520000
18.63
58.76
D1
6000
65
390000
13.97
72.73
G2
300
800
240000
8.60
81.33
F3
500
450
225000
8.06
89.39
A2
2000
50
100000
3.58
92.98
J8
2500
40
100000
3.58
96.56
C7
1500
42
63000
2.26
98.82
H2
600
35
21000
0.75
99.57
E9
1000
12
12000
0.43
100.00
Total:
2791000
Thus Categorization of items as follows :
CLASSIFICATION
ITEMS
A
B8. I5, DI, G2
B
F3, A2
C
J8, C7, H2. E9
Answer to question b :
This information can be used effectively for purpose of effective inventory control and management. Ordering policies of individual items can be handled accordingly.
For A class items which are high value tiems, inventory management control should be stringent to ensure locked up value of inventory is minimized. Thus frequent order processing and ordering policy must be encouraged for these items . However since B and especially C class items are low value items , frequent order processing for such low value items might be a strain on existing resources Thus requirement of these B and C lcass items can be accumulated and they can be ordered at fixed interval periods.
We can follow Economic Order Quantity ( EOQ ) model for ordering A class items which minimizes total ordering plus inventory holding cost . On the other hand, we may use Fixed period ordering policy for B and C Class items .
Answer to question c:
Borgki places item D into A category because it is a high value item in terms of annual cost and constitutes 13.97 % of total value of inventory
Item
Annual demand
Cost/ unit
Annual cost
Percentage of annual cost (%)
Cumulative percentage
B8
4000
280
1120000
40.13
40.13
I5
2600
200
520000
18.63
58.76
D1
6000
65
390000
13.97
72.73
G2
300
800
240000
8.60
81.33
F3
500
450
225000
8.06
89.39
A2
2000
50
100000
3.58
92.98
J8
2500
40
100000
3.58
96.56
C7
1500
42
63000
2.26
98.82
H2
600
35
21000
0.75
99.57
E9
1000
12
12000
0.43
100.00
Total:
2791000
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