IDIS 424 Lect 5-9

Question 1

Total Cost of ownership

Answer 1

Estimate of all direct and indirect costs associated with an asset or acquisition over its entire life cycle

Question 2

Cost elements in TCO

Answer 2

• Cost of goods
• Acquisition costs
• Usage Costs
• End-of-life costs

Question 3

Cost of goods

Answer 3

Invoice amount paid to supplier

Question 4

Acquisition Costs

Answer 4

Costs of bringing product to buyers location

Question 5

Usage Costs

Answer 5

Conversion and support costs such as inventory, scrap, warranty, installation, training, downtime, lost sales costs (opportunity costs)

Question 6

End-of-life costs

Answer 6

Net of amounts received / spent at salvage such as obsolescence, disposal, cleanup, and project termination costs.

Question 7

Opportunity Costs

Answer 7

Cost of the next best alternative

Question 8

Factors considered in TCO

Answer 8

• Use for Larger Purchases
• Obtain senior management buy-in
• Work in a team
• Focus on the big costs first
• Obtain a realistic estimate of the life cycle

Question 9

TCO Model Overview

Answer 9

• Considers cost of goods, usage costs, acquisition costs, end-of-life costs
• Calculated present worth of total costs over lifecycle
• Suggested only for capital equipment / large investment

Question 10

What is inventory?

Answer 10

raw materials, work in process products, and finished goods that are considered in the portion of the business’s assets that are ready or will be ready for sale

Question 11

Inventory

Answer 11

• Generally largest asset in a company
• One of the most important assets of a business

Question 12

Inventory Management

Answer 12

• Avoid stock-outs
• Avoid Excess and Obsolete Inventory
• Move goods Efficiently
• Maximize Profit Margins

Question 13

Inventory Related Costs

Answer 13

• Order Cost
• Holding Cost
• Stock-out Cost

Question 14

Order Cost

Answer 14

Fixed cost (K)
Cost of company facilities, maintenance cost of computer system used, and cost to prepare purchase order

Question 15

Order Cost Equation

Answer 15

Order Cost = K + cQ

Question 16

c =

Answer 16

cost (price) per unit

Question 17

Q =

Answer 17

order quantity

Question 18

Holding Cost

Answer 18

Also known as carrying cost, the sum of all costs that are proportional to the amount of inventory physically on hand at any point in time

Question 19

Costs associated with holding costs

Answer 19

Physical space to store, taxes and insurance, breakage, spoilage, deterioration, and obsolescence, Opportunity cost of alternative investment

Question 20

Holding Cost =

Answer 20

h * average inventory * time length

Question 21

h =

Answer 21

holding cost $ per unit per year

Question 22

Average Inventory =

Answer 22

Area / t2-t1

Question 23

Stock-out Costs

Answer 23

The cost incurred when stock-outs take place

Question 24

Stock-out Costs include

Answer 24

• Cost of emergency shipments
• Change of suppliers with faster deliveries
• Substitution to less profitable items
• Cost in terms of loyalty or the general reputation of company

Question 25

ABC Analysis

Answer 25

Stratification of items into A B C categories

Question 26

A items

Answer 26

• Critical for the company
• Fast-moving and typically lower value
• Significant impact on your service levels and customers satisfaction rate

Question 27

B items

Answer 27

Typically mid-range in inventory value and order frequency

Question 28

C Items

Answer 28

Low moving and high inventory value

Question 29

Inventory Stratification Methods

Answer 29

ABC analysis, Sales Method, GMROII, Hits method

Question 30

Just-In-Time

Answer 30

Makes inventory readily available to meet demand, but not to a point of excess

Question 31

EOQ

Answer 31

The optimal order quantity that minimizes total cost of ownership while meeting all demand

Question 32

TCO =

Answer 32

Order Cost + Holding Cost

Question 33

D =

Answer 33

units per day

Question 34

h =

Answer 34

inventory carrying cost (holding cost) / per unit per year

Question 35

c =

Answer 35

purchasing cost

Question 36

T =

Answer 36

Q/D

Question 37

Quantity Discount

Answer 37

Financial incentive to encourage a buyer to purchase goods in multiple units or in large quantities

Question 38

Why offer Quantity Discount?

Answer 38

Allows sellers or manufactures to reduce inventory by selling more units
- Saves on shipping costs
- Helps to compete with rivals
- Helps lock in customers

Question 39

All Units:

Answer 39

discount is applied to all the units in an order (10% off 5-10 books)

Question 40

Incremental

Answer 40

applies a discount only to units ordered above a specific price tier ( buy one for 100, second is 95)