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Fianl Exam Review

# Fianl Exam Review - Process Management o What is a process...

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Process Management o What is a process: A system of activities that use resources to turn inputs into valuable outputs o Outputs can be: Goods Services Information o Capacity: the amount of input that can go into or the amount that can be created by processes at a given level of resources over a given time period o Utilization: The percentage of process capacity that is actually used = actual output rate / capacity Breakeven o A firm has variable costs of per unit of \$3 and annual fixed costs of \$30,000. What is the break-even point if the sales price is \$8 per unit Total Revenue = Total Cost TR = \$8 * Volume and TC = \$30000 + (\$3 * Volume) \$8 * Volume = \$30000 + (\$3 * Volume) \$5 * Volume = \$30000 volume = 6,000 units per year o Breakeven between two processes Problems 7,8,9 in Chapter 5 Carrying Cost: several expenses that are incurred due to the fact that inventory is being held o Opportunity Cost o Cost of owning and maintaining storage space o Taxes o Insurance o Costs of Obsolescence and Loss o Cost of material handling, tracking, and management o Suppose average inventory for a firm is \$3,500,000. The company has determined that it’s inventory-carrying cost in 25%. What is the annual expense of holding inventory? 3,500,000 * .25 = \$875,000 o The company is able to reduce inventory to an average of \$2,750,00. What is the savings associated with this reduction? 2,750,000 * .25 = 687,500….. 875,000-687,500 = 187,500 Inventory Turnover: the ratio between average inventory and the level of sales

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o Inventory Turnover = Net Sales / Average Inventory at Retail o Inventory Turnover = COGS / Average Inventory at Cost o Inventory Turnover = Sales in Units / Average Inventory in Units Days of Supply o How many days of demand into the future can we satisfy from inventory on hand? Current inventory/expected rate of daily demand Suppose a firm currently has a total of \$8,000 inventory of an item. It expects demand to average \$200 a day. What is the days of supply of the item? \$8000/\$200 = 40 days If the firm consistently maintains an average of 40 days of supply, what inventory turnover rate will it have for the year? 360 days / 40 days = 9 turns/year ROP – Reorder Point o ROP = (avg. Daily Demand)(Lead Time) + Safety Stock When the amount on-hand and on order = ROP Place an order! D = annual demand Co = ordering cost U = unit price Ci = inventory carrying cost EOQ= 2DCo UCi Price Break EOQ Procedure o Identify Price Breaks
o Calculate EOQ’s at each price break o Determine order quantity for each price break EOQ if EOQ > min q Min q if EOQ < min q o Calculate total acquisition costs for each price break, including product cost o Pick Q with lowest total cost TAC: the total acquisition costs o The sum of all relevant inventory costs incurred each year Safety Stock o Example Problem A single warehouse currently has 1,000 units of safety stock. How much is needed if a second warehouse is added?

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