chapter 9 answers to study questions

chapter 9 answers to study questions - chapter 9 ANSWERS TO...

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chapter 9 ANSWERS TO STUDY QUESTIONS 1. Explain why inventory costs and inventory levels have declined relative to GDP over the last 20 years. Is this beneficial to the economy? Why or why not? Answer: The influence of information technology during the late 1990s and its impact on inventories was reflected in the U.S. economy’s ability to grow dramatically while holding inflation in check. This exchange of “information for inventory” showed the impact that inventories have on our economy. With information technology advances escalating in the early twenty-first century, organizations are still implementing programs to take inventories out of the supply chain. The results of this aggressive management of inventories can be seen in Table 9-1, which shows inventory investment as a percent of U.S. gross domestic product (GDP) from 1990 through 2006. As would be expected, the level or value of inventory increases with growth in the U.S. economy. However, the important question is whether total inventory in the economy grows at the same rate as GDP. Obviously, it is best for inventory to increase at a slower rate than GDP. This means that the economy is generating more revenue with less assets and working capital investment. Table 9-1 shows that the nominal GDP grew by 127.2 percent in the time period between 1990 and 2006 while the value of business inventory increased by 78.4 percent during the same time period. However, inventory costs as a percent of GDP declined from 17.9 percent in 1990 to 14.1 percent in 2006. So, even though the absolute value of inventory increased during this time period, it decreased as a percent of GDP. This declining trend indicates that the economy is producing more revenue with less assets and working capital. While the trend is down, the year-to-year changes indicate the element of volatility faced by many organizations. The focus of these data should be on the trend, which clearly indicates a relative decline in inventory value and inventory carrying cost as a percent of GDP—a positive metric for the economy and business organizations in general. Inventories represent a cost of doing business and are included in the prices of products and services. Reductions in inventory costs, especially if there is no decline in customer service, are beneficial to both buyers and sellers. (Pages 322- 323) 2. What are the major components of inventory carrying cost? How would you measure capital cost for making inventory policy decisions? Answer: Inventory carrying costs are those that are incurred by inventory at rest and waiting to be used. From a finished goods inventory perspective, inventory carrying costs represent those costs associated with manufacturing and moving inventory from a plant to a distribution center to await an order. There are four major components of inventory carrying cost: capital cost, storage space cost, inventory service cost, and inventory risk cost. Sometimes called the interest or opportunity cost, capital cost focuses on the cost of capital tied
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chapter 9 answers to study questions - chapter 9 ANSWERS TO...

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