Q2.9 (Major U.S. Retailers) The following table shows financial data (year 2004)

Question

Q2.9 (Major U.S. Retailers) The following table shows financial data (year 2004) for Costco Wholesale and Walmart, two major U.S. retailers. Costco Walmart ($ Millions) ($ Millions) Inventories $ 3,643 $ 29,447 Sales (net) $48,106 $286,103 COGS $41,651 $215,493 Source: Compustat, WRDS. Assume that both companies have an average annual holding cost rate of 30 percent (i.e., it costs both retailers $3 to hold an item that they procured for $10 for one entire year). a. How many days, on average, does a product stay in Costco’s inventory before it is sold? Assume that stores are operated 365 days a year. b. How much lower is, on average, the inventory cost for Costco compared to Walmart of a household cleaner valued at $5 COGS? Assume that the unit cost of the household cleaner is the same for both companies and that the price and the inventory turns of an item are independent.

Explanation / Answer

(a) Days in inventory = Inventory cost / COGS = 3643/41651

Days in Inventory (Costco) = 0.087 years = 31.92 days

Days in Inventory (Walmart) = 29447/ 215493 = 0.1366 years = 49.87 days

(b) Inventory Cost =?

At Costco --- $5 x (0.087) x 0.3 = $ 0.1305

At Walmart --- $ 5 x (0.1366) x 0.3 = $ 0.2049

Lower Cost at Costco (%) = 0.7044/ 0.1305 x 100 = 57%

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