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Chapter 12

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.

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.