ABC ANALYSIS FOR A CHIP MANUFACTURER. Silicon Chips, Inc., maker of superfast DRAM chips, wants to categorize its 10 major inventory items using ABC analysis.
APPROACH \blacktriangleright ABC analysis organizes the items on an annual dollar-volume basis. Shown below (in columns 1–4) are the 10 items (identified by stock numbers), their annual demands, and unit costs.
Chapter 12
Q. 12.EX.1
Step-by-Step
Verified Solution
SOLUTION \blacktriangleright Annual dollar volume is computed in column 5, along with the percentage of the total represented by each item in column 6. Column 7 groups the 10 items into A, B, and C categories.
| (1) ITEM STOCK NUMBER |
(2) PERCENTAGE OF NUMBER OF ITEMS STOCKED |
(3) ANNUAL VOLUME (UNITS) |
× | (4) UNIT COST |
= | (5) ANNUAL DOLLAR VOLUME |
(6) PERCENTAGE OF ANNUAL DOLLAR VOLUME |
(7) CLASS |
|
| #10286 #11526 |
} 20% | 1,000 500 |
$90.00 154.00 |
$ 90,000 77,000 |
38.8% 33.2% |
}72% | A A |
||
| #12760 #10867 #10500 |
} 30% | 1,550 350 1,000 |
17.00 42.86 12.50 |
26,350 15,001 12,500 |
11.3% 6.4% 5.4% |
}23% | B B B |
||
| #12572 #14075 #01036 #01307 #10572 |
} 50% | 600 2,000 100 1,200 250 |
14.17 .60 8.50 .42 .60 |
8,502 1,200 850 504 150 |
3.7% .5% .4% .2% .1% |
}5% | C C C C C |
||
| 8,550 | $232,057 | 100.0% |
INSIGHT \blacktriangleright The breakdown into A, B, and C categories is not hard and fast. The objective is to try to separate the “important” from the “unimportant.”
LEARNING EXERCISE \blacktriangleright The unit cost for Item #10286 has increased from $90.00 to $120.00. How does this impact the ABC analysis? [Answer: The total annual dollar volume increases by $30,000, to $262,057, and the two A items now comprise 75% of that amount.]
RELATED PROBLEMS \blacktriangleright 12.1, 12.2, 12.3 (12.5–12.6 are available in MyOMLab)
EXCEL OM Data File Ch12Ex1.xls can be found in MyOMLab.