Practice Problems: Chapter 11, Supply-Chain Management

Problem 1:
Determine the sales necessary to equal a dollar of savings on purchases for a company
that has a net profit of 6% and spends 70% of its revenues on purchases.
Problem 2:
Determine the sales necessary to equal a dollar of savings on purchases for a company
that has a net profit of 8% and spends 40% of its revenues on purchases.
Problem 3
Phil Carter, President of Carter Computer Components, Corp. has the option of shipping
computer transformers from its Singapore plant via container ship or airfreight. The
typical shipment has a value of $75,000. A container ship takes 24 days and costs $5,000;
airfreight takes 1 day and costs $8,000. Holding cost is estimated to be 40% in either
case. How should shipments be made?
Problem 4
Carol King is evaluating the inventory performance of Johnston Systems. A recent annual
report (all figures in millions) indicates assets of $16,000, inventory of $1,000, and cost
of goods sold of $24,000. What is the inventory turnover and what percent of assets are
tied up in inventory?

ANSWERS
Problem 1:
From Table 11.3, we see that this company would have to increase sales by
approximately $5.56
Problem 2:
From Table 11.3, we see that this company would have to increase sales by
approximately $2.94
Problem 3:
Cost via container ship:

[24 *

(.40 * 75,000)
] + 5,000 = (24 * 82.19) + 5,000 = 1,972.56 + 5,000 = $6,972.56
365

Cost via airfreight:

[1*

(.40 * 75,000)
] + 8,000 = (1* 82.19) + 8,000 = 82.19 + 8,000 = $8,082.19
365

Therefore, use the container ship as it has a lower total cost.

Problem 4
Cost of good sold / inventory investment = 24,000 / 1,000
= 24 (inventory turnover)
Total inventory investment/ Total assets = 1,000 / 16,000
= .0625 = 6.25% (percent of assets in inventory)