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## Q. 12.EX.1

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.

## 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.