Welcome to this article with the aim of helping you with exercises on the cost of passing and possession with corrections from the Operational Management subject of the BTS MCO.
If you would like to first review the course on the same theme, Inventory Management, I invite you to read my article Inventory Management: The 7 Key Points to Master and also the article Supply Management: The 3 essential principles.
The 11 exercises on the cost of transfer and possession with corrections cover the cost of storage, the cost of transfer, the cost of possession, the calculation of alert stock, the minimum stock.
Summary
- Application: TechnoPro Company
- Application: Baskerville SA.
- Application: Bicycloo
- Application: ChocoDent Company
- Application: ICT Flow Control
- Application: Optimum Finances SARL
- Application: PixelArt graphic design company.
- Application: Express Cartonnage Company
- Application: Business ManagementPlus
- Application: STE Economy Plus
- Application: Delicacies Company
Application: TechnoPro Company
States :
TechnoPro buys electronic components needed to produce its high-tech devices. These components are purchased at a unit price of €45 excluding VAT. Over the course of a year, TechnoPro plans to buy 5 of them.
The company recorded that the unit storage cost per year is €3, and the cost of placing an order is €75.
TechnoPro is considering several scenarios:
- scenario 1 with a purchase forecast of 6 components
- scenario 2 with a purchase forecast of 4 components
- scenario 3 with a purchase forecast of 5 components.
The company wants to know the total cost of ownership and handover for each scenario and compare them.
Work to do :
1. What are the procurement and ownership costs for Scenario 1?
2. What are the procurement and ownership costs for Scenario 2?
3. What are the procurement and ownership costs for Scenario 3?
4. What are the possible abuses and deviations linked to poor management of procurement and ownership costs?
5. Which scenarios are the most interesting for TechnoPro in terms of costs?
Proposed correction:
1. For the first scenario, we have: Annual cost of ownership = unit storage cost x number of units = €3 x 6000 = €18.
Annual cost of placing = cost of placing x number of orders = €75 x (6000 ÷ 5000 orders) = €90.
Therefore, the cost of handover and ownership for the first scenario is €18.
2. Then, for the second scenario, we have: Annual cost of ownership = unit storage cost x number of units = €3 x 4500 = €13.
The cost of passing is the same because the fixed cost of passing does not change, i.e. €90.
So the cost of handover and ownership for the second scenario is €13.
3. For the third scenario, we have: Annual cost of ownership = unit storage cost x number of units = €3 x 5000 = €15.
The cost of passing is always the same, i.e. €90.
Therefore, the cost of handover and ownership for the third scenario is €15.
4. Possible drifts of poor management of the cost of ownership and handover include:
– overstocking which increases storage costs
– over-ordering which increases procurement costs
– or even lack of stocks which could interrupt production and reduce productivity.
5. According to the results, the second scenario is the most interesting for TechnoPro in terms of costs, with total costs of ownership and handover of €13, followed by the third scenario at €590, and the first scenario at €15.
Summary of Formulas Used:
| Item | Formulas |
|---|---|
| Cost of ownership | unit storage cost x quantity |
| Cost of passing | cost of placing x number of orders |
Application: Baskerville SA.
States :
Baskerville SA is a trading company that sells fashion items. They bought a batch of 200 sweaters at €10 each. The cost of placing the order is €2000 for 10 orders. The percentage of the cost of ownership is 30%.
Work to do :
1. What is the cost of placing an order?
2. What is the cost of ownership per unit?
3. What is the total cost of ownership?
4. What is the total cost of procurement?
5. What is the company's total cost of inventory management?
Proposed correction:
1. The cost of placing per order is calculated as follows: Cost of placing per order = Placement fee ÷ Number of orders = €2000 ÷ 10 = €200 per order.
2. The carrying cost per unit can be calculated as follows: Carrying cost per unit = (Unit cost x Carrying cost %) ÷ 100 = (€10 x 30) ÷ 100 = €3 per unit.
3. Total cost of ownership is calculated as follows: Total cost of ownership = Cost of ownership per unit x Quantity of inventory = €3 x 200 = €600.
4. The total cost of placing is calculated as follows: Total cost of placing = Cost of placing per order x Number of orders = €200 x 10 = €2000.
5. The total cost of managing the company's inventory is calculated as follows: Total cost = Total cost of ownership + Total cost of handover = €600 + €2000 = €2600.
Summary of Formulas Used:
| Packages | Meaning |
|---|---|
| Cost of ownership per unit = (Unit cost × Cost of ownership %) ÷ 100 | Carrying cost or the cost of holding an inventory per unit |
| Cost of placing per order = Placement fee ÷ Number of orders | Cost of placing or the cost of an order placed |
| Total Cost of Ownership = Cost of Ownership per Unit × Inventory Quantity | Total inventory carrying costs |
| Total cost of placing = Cost of placing per order × Number of orders | Total cost of placing all orders |
| Total Cost = Total Cost of Ownership + Total Cost of Handover | Total inventory management costs |
Application: Bicycloo
States :
Welcome to Bicycloo, a specialist retailer of high-quality bicycles. Bicycloo buys its bicycles at €120 excluding VAT per unit. The fixed costs associated with placing an order amount to €40. Bicycloo estimates its annual demand at 1200 bicycles. Currently, Bicycloo places an order for 30 bicycles each time.
Work to do :
1) What is the cost of ownership if Bicycloo has 50 bikes in stock?
2) What is the cost of transfer for Bicycloo?
3) What is the total cost of ownership and handover for Bicycloo?
4) What would be the new cost of placing an order if Bicycloo decides to order 50 bikes each time instead of 30?
5) What would be the new total cost of ownership and handover for Bicycloo in this case?
Proposed correction:
1) Cost of ownership = Quantity in stock x Unit purchase price excluding VAT = 50 x 120 = €6000. If Bicycloo has 50 bikes in stock, the cost of ownership is €6000.
2) Cost of placing = Fixed cost per order x (Quantity requested ÷ Quantity per order) = 40 x (1200 ÷ 30) = €1600. The cost of placing for Bicycloo is €1600.
3) Total cost = Cost of ownership + Cost of handover = 6000 + 1600 = 7600 €. The total cost of ownership and handover for Bicycloo is 7600 €.
4) New cost of placing = Fixed cost per order x (Quantity requested ÷ New quantity per order) = 40 x (1200 ÷ 50) = €960. If Bicycloo decides to order 50 bikes each time instead of 30, the new cost of placing would be €960.
5) New total cost = Cost of ownership (unchanged) + New cost of handover = 6000 + 960 = 6960 €. In this case, the new total cost of ownership and handover for Bicycloo would amount to 6960 €.
Summary of Formulas Used:
| Formulas | Explanation |
|---|---|
| Cost of ownership = Quantity in stock x Unit purchase price excluding VAT | This formula is used to determine the carrying cost of a company's inventory. |
| Cost of placing = Fixed cost per order x (Quantity requested ÷ Quantity per order) | This formula is used to determine the cost of placing an order. |
| Total Cost = Cost of Ownership + Cost of Handover | This formula is used to determine the total cost of a company's inventory and orders. |
Application: ChocoDent Company
ChocoDent manufactures a variety of chocolates. They are reviewing their inventory management policy and are currently focusing on their flagship product, ChocoCrunch. They would like to understand in detail the company's carrying and procurement costs for this product.
The “ChocoCrunch” has a unit cost of €2, annual holding costs are 25%, and ordering costs are €50 per order. The annual demand is for 1000 boxes of “ChocoCrunch.”
States :
1. Calculate the annual inventory holding cost per unit for “ChocoCrunch”.
2. Calculate the total holding cost of the “ChocoCrunch” inventory.
3. Calculate the cost of placing an order for the “ChocoCrunch”.
4. If ChocoDent decides to order 200 boxes of “ChocoCrunch” each time they place an order, how much will it cost them in fulfillment costs each year?
5. What would be the total cost of ownership of “ChocoCrunch” for a year if ChocoDent decides to order 200 boxes each time?
Work to do :
1. What is the annual inventory holding cost per unit for “ChocoCrunch”?
2. What is the total annual holding cost of the “ChocoCrunch” inventory?
3. What is the cost per order for “ChocoCrunch”?
4. How much would it cost in fulfillment costs each year if ChocoDent decided to order 200 boxes of “ChocoCrunch” every time they placed an order?
5. What would be the total cost of ownership of “ChocoCrunch” for a year if ChocoDent decides to order 200 boxes each time?
Proposed correction:
1. The annual cost of holding the stock per unit is obtained by multiplying the unit cost by the annual holding cost: €2 x 0,25 = €0,5/unit.
2. The total cost of holding the stock is obtained by multiplying the holding cost per unit by the quantity held annually: €0,5/unit x 1000 units = €500.
3. The cost of placing an order for “ChocoCrunch” is €50.
4. If ChocoDent decides to order 200 boxes each time, this means that they will place 1000 units ÷ 200 units/order = 5 orders per year. The annual cost of placing orders would therefore be: 5 orders x €50/order = €250.
5. The total cost of ownership would be the sum of the holding and transfer costs: €500 (holding cost) + €250 (transfer cost) = €750.
Summary of Formulas Used:
– Annual inventory holding cost per unit = Unit cost x Annual holding cost
– Total annual cost of holding inventory = Holding cost per unit x Quantity held annually
– Cost of placing an order = given in the statement
– Number of orders per year = Annual demand ÷ Quantity per order
– Annual cost of placing orders = Number of orders per year x Cost of placing orders per order
– Total cost of ownership = Annual cost of holding inventory + Annual cost of handover.
Application: ICT Flow Control
States :
ICT Flow Control is a trading company specializing in the sale of flow control equipment for various industries. The company faces significant procurement and ownership costs that it seeks to optimize. Given the following information:
– Cost of placing an order: €300 per order
– Economic order quantity (EOQ): 500 units
– Annual purchase quantity: 2500 units
– Unit purchase price: €20 per unit
– Annual storage cost: 10% of the unit purchase price
– Cost of fixed capital: 5% of the unit purchase price
Work to do :
1. Calculate the annual unit storage cost
2. Calculate the annual cost of transfer
3. Calculate the annual cost of ownership
4. Calculate the annual cost of ownership
5. Specify the levers to reduce the cost of ownership
Proposed correction:
1. The annual unit storage cost is 10% x €20 = €2
2. The annual cost of passing is (2500 units ÷ 500 units) x €300 = €1500
3. The annual holding cost is ((QEC ÷ 2) x number of orders x annual unit storage cost) + ((QEC ÷ 2) x number of orders x cost of fixed capital) = ((500 units ÷ 2) x (2500 units ÷ 500 units) x €2) + ((500 units ÷ 2) x (2500 units ÷ 500 units) x €1) = €1250 + €625 = €1875
4. The annual cost of ownership is equal to the annual cost of handover plus the annual cost of holding = €1500 + €1875 = €3375
5. To reduce cost of ownership, ICT Flow Control can:
– Negotiate volume discounts with suppliers to reduce unit purchasing costs
– Optimize its ordering procedures to reduce ordering costs
– Optimize storage space to minimize annual unit storage cost
– Invest in better inventory management to minimize inventory levels and thus the cost of immobilized capital
Summary of Formulas Used:
| Terminology | Formulas |
|---|---|
| Annual cost of transfer | (Annual purchase quantity ÷ QEC) x cost of placing per order |
| Annual holding cost | ((QEC ÷ 2) x number of orders x annual unit storage cost) + ((QEC ÷ 2) x number of orders x cost of fixed capital) |
| Annual cost of ownership | Annual transfer cost + annual holding cost |
Application: Optimum Finances SARL
States :
Optimum Finances SARL is a company that markets different products. The information below concerns one of their products:
– Quantity ordered in each order: 200 units
– Unit cost of passing: €150
– Unit purchase cost: €50
– Possession rate: 25%
– The average stock for this product is 100 units
Work to do :
1. Calculate the cost of passing on this product.
2. Calculate the cost of ownership for this product.
3. What is the total inventory management cost for this product?
4. If the company decided to increase the quantity ordered on each order to 500 units, what would be the impact on costs?
5. What recommendations can you make to optimize inventory management costs for this product?
Proposed correction:
1. The cost of placing (Cp) is equal to the unit cost of placing multiplied by the number of orders. Here, this gives:
Cp = €150 x 200 = €30
2. The cost of possession (Cpos) is equal to half the sum of the product of the unit purchase cost and the quantities in stock multiplied by the possession rate. Here, this gives:
Cpos = ((€50 x 100) ÷ 2) x 0,25 = €1
3. The total cost of inventory management is the sum of the transfer cost and the carrying cost.
Ct = Cp + Cpos = €30 + €000 = €1
4. If the company decides to increase the quantity ordered on each order to 500 units, the placing cost would increase, but the carrying cost would decrease. The total cost would need to be calculated to determine the impact on costs.
5. To optimize inventory management costs, the company could consider reducing the quantity ordered on each order to reduce the cost of placing an order, provided that this does not affect customer service. Additionally, they could consider renegotiating their holding rate with their supplier or looking for other ways to reduce inventory costs.
Summary of Formulas Used:
| Formulas | Description |
|---|---|
| Cost of placing (Cp) = Unit cost of placing x Number of orders | This formula is used to calculate the cost of placing an order, i.e. the cost incurred by the process of ordering products. |
| Cost of ownership (Cpos) = ((Unit purchase cost x Quantities in stock) / 2) x Possession rate | This formula is used to calculate the cost of ownership, which includes the cost of storage, insurance, taxes and the loss of opportunity due to tied up capital. |
| Total cost (Ct) = Cost of placement (Cp) + Cost of possession (Cpos) | This formula is used to calculate the total cost which includes both the costs of acquisition and ownership. |
Application: PixelArt graphic design company.
States :
PixelArt, a graphic design company, is looking to optimize its inventory management. As part of this, it wants to analyze its handling and holding costs. The software used by PixelArt to manage its activities generates the following data:
– Cost of placing an order: €150
– Unit storage cost per year: €2
– Quantity ordered per year: 5000 units
– Unit purchase price of an item: €40
Work to do :
1. Calculate the total cost of placing orders over a year.
2. What is the carrying cost of inventory over a year?
3. What is the total cost of inventory management over a year?
4. What percentage of the total inventory cost is carrying cost?
5. What percentage of the total inventory cost is the transfer cost?
Proposed correction:
1. Total cost of procurement = cost of procurement x quantity ordered = €150 x 5000 = €750
2. Cost of ownership = storage cost x quantity ordered = €2 x 5000 = €10
3. Total inventory management cost = transfer cost + holding cost = €750 + €000 = €10
4. Cost of ownership percentage = (cost of ownership ÷ total cost) x 100 = (€10 ÷ €000) x 760 = 000%
5. Percentage of procurement cost = (procurement cost ÷ total cost) x 100 = (€750 ÷ €000) x 760 = 000%
Summary of Formulas Used:
| Formulas | Description |
|---|---|
| Total cost of placement = cost of placement x quantity ordered | Calculating the total cost of placing orders over a year |
| Cost of ownership = storage cost x quantity ordered | Calculating the cost of carrying inventory over a year |
| Total inventory management cost = cost of placement + cost of ownership | Calculating the total cost of inventory management over a year |
| Cost of ownership percentage = (cost of ownership ÷ total cost) x 100 | Calculating the percentage of total cost that represents the cost of ownership |
| Percentage of contracting cost = (contracting cost ÷ total cost) x 100 | Calculation of the percentage of the total cost that represents the cost of award |
Application: Express Cartonnage Company
States :
Cartonnage Express, a company specializing in the manufacture of custom cardboard boxes, purchases a raw material at €150 per tonne. Its supplier has offered it a 10% discount on the price per tonne if it orders in batches of 500 tonnes. Knowing that the cost of ownership is 25% of the purchase price and that the cost of placing an order is €75 per order, determine:
1. The unit purchase cost,
2. The purchase cost for 500 tons,
3. The cost of ownership for 500 tons,
4. The cost of passing for 500 tons,
5. The total cost of the operation for 500 tons.
Work to do :
1. Calculate the unit purchase cost of the product after the 10% discount,
2. Then calculate the total purchase cost for 500 tons after the reduction,
3. Calculate the cost of ownership for 500 tons,
4. Calculate the cost of passing for 500 tonnes,
5. Finally, determine the total cost of the operation for 500 tons.
Proposed correction:
1. The unit purchase cost is €150 x (1 – 0,1) = €135
2. The purchase cost for 500 tonnes is €135 x 500 = €67
3. The cost of ownership is 25% x €67 = €500
4. The cost of placing an order is fixed at €75 per order. So for 500 tonnes, it is always €75.
5. The total cost of the operation for 500 tonnes is €67 (purchase cost) + €500 (ownership cost) + €16 (handover cost) = €875
Summary of Formulas Used:
| Unit purchase cost | Unit price x (1 – discount) |
| Total purchase cost | Unit purchase cost x quantity |
| Cost of ownership | Total purchase cost x ownership rate |
| Cost of passing | Fixed cost per order |
| Total cost of the operation | Total purchase cost + cost of ownership + cost of handover |
Application: Business ManagementPlus
States :
GestionPlus is a company specializing in the import and sale of high-tech products. It is currently facing cost management challenges due to its complex procurement process. Following a series of exchanges with suppliers, the company obtained information on five products (A, B, C, D & E). The following table presents the information obtained for each product:
| Product | Unit purchase cost (€) | Quantity ordered at each order placement (unit) | Cost of placing an order (€) | Average Stock (unit) | Unit cost of ownership per year (€) |
|---|---|---|---|---|---|
| A | 500 | 200 | 1000 | 100 | 10 |
| B | 700 | 150 | 750 | 80 | 20 |
| C | 600 | 120 | 600 | 60 | 15 |
| D | 800 | 170 | 800 | 50 | 25 |
| E | 900 | 200 | 750 | 70 | 30 |
Work to do :
1. Calculate the total cost of passing on each product.
2. Calculate the total cost of ownership for each product.
3. Explain why knowing these costs is important for GestionPlus.
4. Propose an idea to reduce procurement costs.
5. Propose an idea to reduce ownership costs.
Proposed correction:
1. The total placing cost for each product is calculated by multiplying the cost of placing an order by the number of orders placed in the year. Since the quantity ordered at each placing is given, it is assumed here that the entire average stock is sold and ordered in the year. We therefore have:
– For product A: Total cost of procurement = (100 / 200) x 1 = €000
– For product B: Total cost of procurement = (80 / 150) x 750 = €400
– For product C: Total cost of procurement = (60 / 120) x 600 = €300
– For product D: Total cost of transfer = (50 / 170) x 800 = €235,29
– For product E: Total cost of transfer = (70 / 200) x 750 = €262,5
2. The total cost of ownership for each product is calculated by multiplying the unit cost of ownership per year by the average inventory. We therefore have:
– For product A: Total cost of ownership = 10 x 100 = €1
– For product B: Total cost of ownership = 20 x 80 = €1
– For product C: Total cost of ownership = 15 x 60 = €900
– For product D: Total cost of ownership = 25 x 50 = €1
– For product E: Total cost of ownership = 30 x 70 = €2
3. Knowing these costs is important to GestionPlus because it allows it to make informed decisions about procurement. By analyzing these costs, the company can identify products that cost more to stock or replenish and take steps to minimize these costs.
4. To reduce ordering costs, GestionPlus may negotiate lower rates for bulk orders with its suppliers, use automated systems to place orders, or simplify the ordering process.
5. To reduce carrying costs, GestionPlus could reduce the level of inventory it maintains, negotiate lower storage rates, sell inventory more quickly or improve its inventory management to avoid overstocking or understocking.
Summary of Formulas Used:
| Formulas | Description |
|---|---|
| (Average stock / Quantity ordered per order) x Cost of placing order | Formula for calculating total cost of ownership |
| Unit Holding Cost x Average Inventory | Formula to calculate total cost of ownership |
Application: STE Economy Plus
States :
The company Economie Plus is a household appliance sales company. It buys a refrigerator for €500 excluding VAT and resells it to its customers for €700 excluding VAT. The applicable VAT rate is 20%. The cost of placing an order is €100 excluding VAT and the cost of holding the stock is €150 excluding VAT per refrigerator per month.
Work to do :
1. Calculate the purchase price excluding tax (PA HT).
2. Calculate the sales price excluding tax (PV HT).
3. Calculate the cost of placing the order.
4. Calculate the inventory carrying cost.
5. Calculate the company's profit.
Proposed correction:
1. The HT PA refers to the purchase price excluding taxes. According to the statement, the refrigerator is purchased for €500 excluding taxes. Therefore, the HT PA is €500.
2. The PV HT refers to the sales price excluding taxes. According to the statement, the refrigerator is sold at €700 excluding taxes. Therefore, the PV HT is €700.
3. The ordering cost is the cost associated with placing a specific order. According to the statement, this cost is €100 excluding VAT for each order. Therefore, the ordering cost is €100 per refrigerator.
4. The inventory carrying cost is the cost of holding goods in inventory. According to the statement, the inventory carrying cost is €150 excluding VAT per month for each refrigerator. Thus, the inventory carrying cost is €150 per refrigerator per month.
5. Profit is the difference between the PV excluding VAT and the PA excluding VAT, minus the ordering cost and the inventory holding cost. That is, €700 (PV excluding VAT) – €500 (PA excluding VAT) – €100 (placement cost) – €150 (holding cost) = €50. Thus, the company makes a profit of €50 per refrigerator sold.
Summary of Formulas Used:
| Packages | Description |
|---|---|
| PA HT | Purchase Price Excluding Tax |
| PV HT | Sales Price Excluding Taxes |
| Cost of passing | Cost of ordering |
| Cost of ownership | Cost of carrying inventory |
| Profit | PV HT – PA HT – Cost of transfer – Cost of ownership |
Application: Delicacies Company
States :
Delicacies is a company specializing in the production of food products. It is faced with inventory management issues and is seeking to optimize its transfer and possession costs.
Currently, she places an order every month for the production of her products. Each order costs her €270 in administrative costs and €100 in delivery costs.
She estimates that she uses an average of 3600 units of raw materials per month for the production of her products. The unit holding cost is €0,50 per unit per month.
Delicacies company must pay VAT on raw materials at a rate of 20%.
Work to do :
1. Calculate the annual contracting costs of Delicacies Company.
2. Calculate the annual carrying costs of Delicacies Company.
3. Propose a strategy for the company to reduce these costs.
4. Estimate the impact of this strategy on the company's costs of handing over and owning.
5. Analyze the benefits and drawbacks of this strategy.
Proposed correction:
1. Annual ordering cost = (Administrative costs + delivery costs) x Number of orders per year
= (€270 + €100) x 12 = €4440
2. Annual cost of ownership = Unit cost of ownership x Average quantity used per month x 12
= €0,50 x 3600 x 12 = €21600
3. A possible strategy for Delicacies would be to place orders more frequently, but in smaller quantities. This could reduce carrying costs, but would increase fulfillment costs.
4. The impact of this strategy on the company's ordering and carrying costs will depend on the number of additional orders placed and the reduction in the average quantity used per order.
5. Benefits of this strategy include reduced carrying costs, the ability to better manage inventory, and potentially improved product quality through faster product turnover. Disadvantages could include increased handling costs and a higher administrative workload.
Summary of Formulas Used:
| Packages | Explanation |
|---|---|
| Cost of placing orders = (Administrative costs + delivery costs) x Number of orders per year | This is the formula to calculate the total cost of placing orders over a year. |
| Cost of ownership = Unit cost of ownership x Average quantity used per month x 12 | This is the formula to calculate the total cost of inventory ownership over a year. |