DAT, Inc., produces digital audiotapes to be used in the consumer audio division

Question

DAT, Inc., produces digital audiotapes to be used in the consumer audio division. DAT lacks sufficient personnel in its inventory supply section to closely control each item stocked, so it has asked you to determine an ABC classification. Here is a sample from the inventory records AVERAGE PRICE PER UNIT ITEM MONTHLY DEMAND 1,400 2,400 4,900 800 300 3,300 4,600 1,800 900 400 $20.00 10.00 27.00 6.00 10.00 9.00 5.00 14.00 2.00 7.00 10 Develop an ABC classification for these 10 items tem Monthly Usage ($) Class 10

Explanation / Answer

According to ABC analysis , Ideally

A class have 20% of items account for 65% of the value

B class have 30% of the items account for 25% of the value

C class will have 50% of the items account for 10% of the value

COnsider the below table

Monthly usage = demand * price per unit

So the total monthly usage $ = total of all the monthly usages of all the products = $ 274600.

Now it is important to arrange monthly usage in assending order

According to above table , item 3 is having more value i.e $ 132300 compared to other items.

Item 3 contribution = 132300 / Total value = 132300/274600= 48%.

Item 6 is contrbutiong more value i.e $ 29700 after item 3. Its contribution is 29700/274600= 11%

So Cumlative contribution of Item 3 & item 6 = 48% + 11% = 59%.

Similarly cumulative contribution is shown for all the and items and classes are shown below

Now the item 3 and item 6 are two items out of 10 items contributing maximum .So they are classified as A .

Items 1 ,8 and 2 contributing to next 25% of the total value. So they are classified as B. These are 30% of total items ( 10 items) .

Items 7,4,5,10 & 9 are classified as C . As these are 50% of total items ( 10) contributing only last 10% of the total value

ITEM Monthly Demand Unit Price Monthly Usage in Dollars 1 1400 20 28000 2 2400 10 24000 3 4900 27 132300 4 800 6 4800 5 300 10 3000 6 3300 9 29700 7 4600 5 23000 8 1800 14 25200 9 900 2 1800 10 400 7 2800 TOTAL 274600

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