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.

Question

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 [latex]\blacktriangleright[/latex] 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.

Accepted Answer

SOLUTION [latex]\blacktriangleright[/latex] 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 [latex]\blacktriangleright[/latex] 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 [latex]\blacktriangleright[/latex] 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 [latex]\blacktriangleright[/latex] 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.

Question 12.EX.1: ABC ANALYSIS FOR A CHIP MANUFACTURER. Silicon Chips, Inc., m...

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