Welcome to this article with the aim of helping you with exercises on cost of transfer 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 transfer and possession costs with corrections cover storage costs, transfer costs, possession costs, calculation of alert stock, minimum stock.
In this section:
- Application: Pearl Story Company
- Application: FashionCo Company
- Application: Business Good Cooks
- Application: Sun Entrepreneur
- Application: Home Decor Company
- Application: FreshFood Company
- Application: Company of the Senses
- Application: TechMove Company
- Application: Barbecook Ltd
- Application: TechnoVibe Company
- Application: Brioche Dorée Company
Application: Pearl Story Company
States :
Pearl Story is a Paris-based distributor of luxury pearls that wants to optimize its inventory in order to reduce costs.
Currently, the company buys each pearl at €20, sells each pearl at €40, and estimates that it sells 2 pearls per year. The cost of holding a pearl in stock is estimated at 000% of the purchase price per year, and the cost of placing an order is €10.
Work to do :
1. Calculate the total cost of ownership.
2. Calculate the total cost of procurement.
3. Calculate the total cost of inventory.
4. Deduct the margin rate.
5. Deduct the markup rate.
Proposed correction:
1. The total cost of ownership is calculated by the formula: Cost of ownership per unit x quantity in stock. Here, the cost of ownership per unit is €20 x 10% = €2. So the total cost of ownership is €2 x 2 = €000.
2. The total cost of placement is calculated by the formula: Placement cost per order x number of orders per year. Here, the placement cost is fixed at €50 per order. If we consider that each order contains 100 beads, this makes 20 orders per year (2 ÷ 000). Therefore, the total cost of placement is €100 x 50 = €20.
3. The total cost of the inventory is the sum of the two previous costs: €4 (possession) + €000 (transfer) = €1.
4. The margin rate is calculated using the formula: ((Sale price excluding VAT – Purchase price excluding VAT) ÷ Purchase price excluding VAT) x 100. Here, this gives ((€40 – €20) ÷ €20) x 100 = 100%.
5. The markup rate is calculated using the formula: ((Sale price excluding VAT – Purchase price excluding VAT) ÷ Sale price excluding VAT) x 100. Here, this gives ((€40 – €20) ÷ €40) x 100 = 50%.
Summary of Formulas Used:
| Formulas | Explanation |
|---|---|
| Holding cost per unit x quantity in stock | Allows you to determine the total cost of inventory ownership |
| Cost of placing per order x number of orders per year | Allows you to calculate the total cost of placing orders |
| Total Cost of Ownership + Total Cost of Handover | Allows you to calculate the total cost of inventory |
| ((Selling price excluding tax – Purchase price excluding tax) ÷ Purchase price excluding tax) x 100 | Allows you to calculate the margin rate |
| ((Sales price excluding tax – Purchase price excluding tax) ÷ Sales price excluding tax) x 100 | Allows to determine the mark rate |
Application: FashionCo Company
States :
FashionCo, a company specializing in the sale of women's clothing, is in the process of strategically reflecting on its inventory management policy. The CEO wants to have better visibility on the costs of passing on and holding inventory in order to optimize its cash management. Here is the data at your disposal:
– The company’s average stock is €200
– The possession rate is 25%
– The company places 1 orders per year
– The cost of placing an order is €50
Work to do :
Question 1: What is the cost of carrying inventory?
Question 2: What is the cost of stock transfer?
Question 3: What does the ownership rate represent?
Question 4: What is the cost of handover?
Question 5: How important is cost of delivery and ownership management for FashionCo?
Proposed correction:
Question 1:
The inventory carrying cost can be calculated as follows:
Inventory holding cost = Average inventory x Holding rate
Cost of carrying inventory = €200 x 000% = €25
So the cost of carrying the stock is €50.
Question 2:
The cost of stock transfer can be calculated as follows:
Cost of placing inventory = Number of orders x Cost of placing per order
Cost of stock transfer = 1 x €000 = €50
So the cost of transferring the stock is €50.
Question 3:
The holding rate represents the percentage of the inventory holding cost compared to the average inventory value. It is a key indicator in inventory management, as it gives an idea of the overall cost incurred by storing products.
Question 4:
The placing cost is the cost associated with placing an order with a supplier. It includes all costs related to the order, such as invoicing, inspection, processing, and payment for the order.
Question 5:
Managing the cost of handover and carrying is crucial for FashionCo. These costs represent a significant portion of the company’s expenses. By optimizing these costs, FashionCo can improve its profitability and competitiveness in the market. In addition, good management of these costs can also help improve cash flow and avoid stockouts.
Summary of Formulas Used:
| Formulas | Description |
|---|---|
| Inventory holding cost = Average inventory x Holding rate | This formula is used to calculate the carrying cost of inventory. |
| Cost of placing inventory = Number of orders x Cost of placing per order | This formula is used to calculate the cost of carrying inventory. |
Application: Business Good Cooks
States :
The company Les bons cuisiniers is a store specializing in the sale of culinary products. It has a warehouse for storing products and has obtained the following information regarding their stock of mixers:
– Initial stock of mixers: 5000 units
– Final stock of mixers: 3000 units
– Unit cost of ownership per mixer: €2
– Number of mixer orders placed during the year: 50 orders
– Unit cost of placing an order: €150
Work to do :
1. Calculate the average stock of mixers over the year.
2. Calculate the total cost of ownership of the blenders.
3. Calculate the total cost of placing mixer orders.
4. Determine the total cost of the inventory.
5. Propose strategies that the company could adopt to reduce these costs.
Proposed correction:
1. The average stock of mixers is calculated by the formula (Initial stock + Final stock) ÷ 2:
(5000 units + 3000 units) ÷ 2 = 4000 units
2. The total cost of ownership of mixers is calculated by the formula Average inventory x Unit cost of ownership:
4000 units x 2 € = 8000 €
3. The total cost of placing mixer orders is calculated by the formula Number of orders x Unit cost of placing:
50 orders x €150 = €7500
4. The total cost of inventory is the sum of the carrying cost and the transfer cost:
8000 € + 7500 € = 15500 €
5. To reduce these costs, the company could consider different strategies:
– Increase inventory management efficiency to reduce average stock quantity.
– Negotiate with suppliers to reduce the cost of placing orders.
– Looking for cheaper storage alternatives could also help reduce costs.
Summary of Formulas Used:
| Packages | Explanations |
|---|---|
| Cost of ownership = Average inventory x Unit cost of ownership | This calculation helps to understand the share of costs linked to product storage. |
| Cost of placing = Number of orders x Unit cost of placing | This calculation helps to understand the share of costs linked to the logistics of placing orders. |
| Average stock = (Initial stock + Final stock) ÷ 2 | This calculation gives an average representation of the company's stock over a given period. |
Application: Sun Entrepreneur
States :
Soleil is a solar panel sales company. It seeks to reduce its storage costs and those related to ordering in order to optimize its financial management.
The company has the following information for one of its solar panel references:
– The cost of ownership per unit per month is €10.
– The cost of placing an order is €500.
– The annual demand is 1200 units.
– The order is made every 2 months.
Work to do :
1 – Calculate the annual cost of ownership for this solar panel reference.
2 – Calculate the annual transfer cost for this reference.
3 – Calculate the total annual inventory management cost for this reference.
4 – Suppose the company decides to reduce the ordering frequency to every 3 months. How does this affect the annual ordering cost?
5 – What advice would you give to the Soleil company to optimize its inventory management?
Proposed correction:
1 – The annual cost of ownership is calculated by multiplying the cost of ownership per unit per month by the total number of units demanded annually. Therefore, the annual cost of ownership is €10 x 1200 = €12.
2 – The company places six orders per year (12 months ÷ 2 months per order). Therefore, the annual placing cost is €500 x 6 = €3.
3 – The total cost of inventory management is the sum of the carrying cost and the handover cost. Therefore, the total cost is €12 + €000 = €3.
4 – If the company decides to place an order every 3 months, it will place 4 orders per year (12 months ÷ 3 months per order). The annual placing cost will therefore be €500 x 4 = €2.
5 – To optimize its inventory management, Soleil may consider further reducing the frequency of ordering to reduce the cost of placing orders. However, it must take into account the cost of ownership that could increase. Thus, it must find a balance between these two costs.
Summary of Formulas Used:
| Packages | Explanations |
|---|---|
| Cost of ownership | It is the cost of holding an inventory. It may include storage costs, financing costs, obsolescence costs, etc. |
| Cost of passing | This is the cost incurred when placing an order. It may include administration costs, transportation costs, etc. |
| Total cost | It is the sum of the cost of ownership and the cost of handover. |
Application: Home Decor Company
States :
The company Maison Déco is a store specializing in the sale of home decoration. It offers a wide range of products from small decorative accessories to furniture.
Inventory management is a major challenge for the company. It must constantly balance between the cost of placing orders and the cost of carrying inventory.
For one of its products, the cost of an order is estimated at €100, the cost of holding a unit of stock is €2 per year and the annual demand is 2000 units.
Work to do :
1. Calculate the total cost of procurement for the year.
2. Calculate the total cost of ownership for the year.
3. What would be the total cost if the company decided to place only one order for the year?
4. What would be the total cost if the company decided to place an order every month?
5. What is the order of magnitude of the number of orders that would minimize the total cost?
Proposed correction:
1. The total cost of procurement for the year is: Cost of procurement x Number of orders = €100 x (2000 ÷ 1) = €200.
2. The total cost of ownership for the year is: Cost of ownership x Quantity of inventory = €2 x 2000 = €4.
3. If the company placed only one order for the year, the total cost would be the placing cost + the carrying cost = €100 + €4 = €000.
4. If the company placed an order every month, the total cost would be the placing cost x 12 + carrying cost = €100 x 12 + ((2000 ÷ 12) x €2) = €1 + (200 x €166.67) = €2.
5. To minimize total cost, we should balance the placing cost and the holding cost. Denoting Q as the quantity ordered, we are looking for Q such that Placing cost x (2000 ÷ Q) = Holding cost x Q. Solving this equation, we find that Q ? sqrt((2000 x 100) ÷ 2) ? 316 units. Therefore, the company should place approximately 2000 ÷ 316 ? 6 orders per year.
Summary of Formulas Used:
| Total cost of procurement | = Cost of placing x Number of orders |
| Total Cost of Ownership | = Cost of ownership x Quantity of stock |
| Total cost (1 order) | = Cost of handover + Cost of ownership |
| Total cost (12 orders) | = Cost of handover x 12 + ((Annual demand ÷ 12) x Cost of ownership) |
Application: FreshFood Company
States :
FreshFood is a company specializing in the sale of fresh fruits and vegetables. The company must manage a large inventory to ensure the availability of its products all year round. In order to optimize its inventory management, the management of FreshFood called on a financial management expert to analyze the cost of passing and holding its inventory. The information provided by the company is as follows:
– The cost of placing an order is estimated at €200.
– The unit ownership cost per year is 25% of the purchase price.
– The company sells an average of 5000 units of product X per year.
– The unit purchase price of product X is €10.
Work to do :
1. Calculate the annual cost of ownership for product X.
2. Calculate the annual cost of delivery for product X.
3. Calculate the total inventory management cost for product X.
4. Propose a strategy to optimize the inventory management cost for product X.
5. Explain the impact this strategy could have on the business.
Proposed correction:
1. The annual cost of ownership for product X is calculated by multiplying the unit cost of ownership by the number of units sold. Here, the unit cost of ownership is 25% of the purchase price, or €2,5. The annual cost of ownership is therefore €2,5 x 5000 = €12.
2. The annual ordering cost for product X is calculated by multiplying the ordering cost by the number of orders placed during the year. In our case, the company sells 5000 units in a year, and the ordering cost is €200 per order. Let's assume that the company places an order for each unit it sells, which gives: €200 x 5000 = €1.
3. The total inventory management cost for product X is the sum of the carrying cost and the handover cost. In this case, €12 + €500 = €1.
4. To reduce the cost of inventory management, the company could consider reducing the number of orders, for example by placing larger but less frequent orders.
5. This could have several impacts on the business. On the one hand, it would reduce the cost of placing orders, which would be positive for the business. However, it could also mean having to manage larger inventories, which would increase carrying costs.
Summary of Formulas Used:
| Formulas | Description |
|---|---|
| Annual Cost of Ownership = Unit Cost of Ownership x Number of Units Sold | Calculates the annualized cost of carrying inventory |
| Annual Placement Cost = Placement Cost per Order x Number of Annual Orders | Calculates the annualized cost of placing an order |
| Total Cost of Inventory Management = Annual Carrying Cost + Annual Handover Cost | Calculates the total cost associated with inventory management |
Application: Company of the Senses
States :
La Compagnie des Sens is a herbalist company that sells medicinal plants. Currently, the company buys and sells approximately 10,000 units of chamomile each year at €2,00 per unit. The costs associated with each order (ce) are €30,00 for transport and administration costs. The possession rate is estimated at 20% of the inventory unit cost.
Work to do :
1. Calculate the cost of the contract.
2. Calculate the unit carrying cost.
3. Calculate the annual cost of ownership.
4. Suppose that Compagnie des Sens decides to double the quantity ordered per order to reduce the cost of placing. What would be the new cost of placing?
5. Assuming that Compagnie des Sens doubles the number of orders, what would be the total annual cost of ownership and placement?
Correction Proposal:
1. The cost of passing (Co) is €30,00 ÷ €10,000 = €0,003.
2. The unit cost of ownership (unit Cp) is 20% x €2,00 = €0,40.
3. The annual cost of ownership (Cp) is €0,40 x 10,000 = €4,000.00.
4. If the company doubles the quantity ordered, the new placing cost would be €30,00 ÷ (10,000 x 2) = €0,0015.
5. If the company doubles the number of orders, the total annual cost of ownership would be €0,40 x (10,000 x 2) = €8,000.00 and the cost of handover would be €0,0015 x (10,000 x 2) = €30,00. The total annual cost of ownership and handover would therefore be €8,030.00.
Summary of Formulas Used:
| Formulas | Description |
|---|---|
| Cost of passing (Co) = Ce ÷ Q | The cost of placement (Co) is equal to the cost of execution (Ce) divided by the quantity (Q). |
| Cost of ownership (Cp) = Unit Cp x Q | The carrying cost (Cp) is equal to the unit carrying cost multiplied by the quantity (Q). |
Application: TechMove Company
States :
TechMove, a company specializing in the production and sale of technological equipment, is reviewing its sourcing and inventory management strategy. The company has identified that inventory transfer and holding costs are essential components of their operational expenses.
Over the course of a year, TechMove places 200 purchase orders with its primary supplier, each order costing €150 (including shipping and handling). The average purchase cost of a unit of inventory is €50. The company has determined that the cost of carrying inventory (including spoilage and obsolescence costs) is 10% of the purchase cost.
Work to do :
1. Calculate the annual cost of procurement for TechMove.
2. What is the annual carrying cost for a unit of inventory at TechMove?
3. What is the impact if the company decides to halve the number of orders placed each year?
4. If TechMove decides to diversify its suppliers in order to reduce the cost per order by 25%, how would this affect the procurement costs?
5. How would the cost of ownership be affected if the storage cost was reduced to 8%?
Proposed correction:
1. Annual cost of placing orders = number of orders x cost per order = 200 x €150 = €30.
2. Annual cost of ownership for a unit of stock = Purchase cost + storage cost = €50 + €50 x 10/100 = €50 + €5 = €55.
3. If the company cuts the number of orders placed each year in half, the annual cost of placing orders would also be cut in half. Thus, the new annual cost of placing orders would be €30 ÷ 000 = €2.
4. If TechMove reduces the cost per order by 25%, the new cost per order would be €150 – €150 x 25/100 = €150 – €37,5 = €112,5. Therefore, the new annual contracting cost would be 200 x €112,5 = €22, a saving of €500 compared to the original.
5. If the storage cost is reduced to 8%, the annual carrying cost for one unit of inventory would be €50 + €50 x 8/100 = €50 + €4 = €54. Thus, TechMove would save €1 per unit of inventory.
Summary of Formulas Used:
| Formulas | Explanation |
|---|---|
| Cost of placing = number of orders x cost per order | This is the formula to calculate the total cost of handing over the business. |
| Cost of ownership = Cost of purchase + cost of storage | The formula for carrying cost takes into account the initial cost of purchase as well as the costs of maintaining inventory (e.g. storage costs). |
Application: Barbecook Ltd
States :
Barbecook is a company that produces and sells barbecues. The company purchases cooking grids from a supplier at a price of €10 per grid. The unit cost of placing an order is €50, and the unit cost of storing a grid is €2 per year. The company sells 10000 cooking grids annually.
Work to do :
1. Determine the annual contracting cost for the company.
2. Calculate the annual cost of ownership.
3. Find the economic order quantity.
4. How can the company reduce its procurement cost?
5. How can the company reduce its cost of ownership?
Proposed correction:
1. Cost of placing = Unit cost of order x Number of orders = €50 x 10000 = €500000. The annual cost of placing for the company is €500000.
2. Cost of ownership = Unit storage cost x Average stock quantity = €2 x 5000 = €10000. The annual cost of ownership for the company is €10000.
3. Economic order quantity (EOQ) = ?((2 x Placement cost x Annual consumption) ÷ Cost of ownership) = ?((2 x €50 x 10000) ÷ €2) = 1000. The economic order quantity for the company is 1000 grids.
4. The company can reduce its cost of procurement by negotiating lower delivery rates with its suppliers, reducing the cost of order processing, improving its supplier management, etc.
5. The company can reduce its cost of ownership by minimizing the level of inventory held, negotiating lower purchasing prices with its suppliers, improving the efficiency of its warehouses, etc.
Summary of Formulas Used:
| Packages | Meaning |
|---|---|
| Cost of placing = Unit cost of order x Number of orders | Formula for calculating the total cost of placing orders: includes administrative, logistics, etc. costs. |
| Cost of ownership = Unit storage cost x Average inventory quantity | Formula for calculating the total cost of inventory ownership: includes the cost of purchasing, storing, insurance, etc. |
| Economic Order Quantity (EOQ) = ?((2 x Placement Cost x Annual Consumption) ÷ Holding Cost) | Optimal order quantity that minimizes total cost (placement + possession) |
Application: TechnoVibe Company
States :
TechnoVibe is a distributor of high-end electronic products. To manage its inventory effectively, the company must deal with both fulfillment and carrying costs. Fulfillment costs are the costs incurred to place an order with suppliers, while carrying costs are the costs incurred to hold inventory.
Here is the available information:
– Cost of placing an order: €150
– Unit cost of a product: €200
– Quantity requested annually: 12000 units
– Possession rate: 25%
– Waiting time to receive an order: 15 days
Work to do :
1. Calculate the annual cost of ownership.
2. Calculate the annual cost of the contract.
3. Calculate the number of orders needed to minimize total costs.
4. What are the minimum total costs?
5. What would be the consequences if the waiting time to receive an order increased to 20 days?
Proposed correction:
1. The annual cost of ownership is calculated by multiplying the ownership rate by the unit cost of the product and half of the annual quantity demanded. Which gives: 25% x €200 x 12000 units ÷ 2 = €300,000.
2. The annual cost of placing is calculated by dividing the cost of placing per order by the number of annual orders. To minimize these costs, the goal is to place as few orders as possible. Here, since the annual demand is 12000 units and the cost of placing is €150 per order, if the company places one order per unit, the annual cost of placing would be €150 x 12000 = €1,800,000.
3. The number of orders required to minimize total costs is calculated using the square root formula of ((2 x Placement Cost x Annual Demand) ÷ Unit Carrying Cost). Which gives: ?((2 x €150 x 12000) ÷ (25% x €200)) ? 547 orders.
4. The minimum total costs are therefore: (Annual cost of ownership + Annual cost of handover) = (€300,000 + (€150 x 547)) = €382,050.
5. If the waiting time to receive an order were increased to 20 days, this would increase carrying costs because the company would have to keep more inventory to meet demand during the waiting time. It could also increase the cost of placing orders if the company decides to place smaller orders more frequently to minimize the inventory held.
Summary of Formulas Used:
| Formulas | Description |
|---|---|
| Cost of Ownership = Ownership Rate x Unit Cost x (Annual Demand ÷ 2) | Allows you to calculate the annual cost of ownership. |
| Cost of placing = Cost of placing per order x Number of annual orders | Allows you to calculate the annual transfer cost. |
| Minimum Orders = ?((2 x Placement Cost x Annual Demand) ÷ Cost of Ownership per Unit) | Allows you to calculate the number of orders needed to minimize total costs. |
| Minimum total cost = Annual cost of ownership + Annual cost of handover | Allows you to calculate the minimum total cost. |
Application: Brioche Dorée Company
States :
Brioche Dorée, a company specializing in the bakery and pastry sector, wants to review its inventory management to optimize its costs. The credibility of the financial institution requires a rigorous analysis of all its transfer and possession costs. One of its flagship products, pain au chocolat, presents the following figures:
– Annual demand (D): 200 units
– Cost of ownership per unit (C): €0,20
– Cost of placing an order (S): €50
– Interest rate (i): 5%
The following questions are asked for the optimization of its inventory management.
Work to do :
1. Calculate the carrying cost if the company orders 1000 pains au chocolat at a time.
2. Estimate the cost of placing orders if the company places 200 orders per year.
3. What is the total cost if the company opts for an order quantity of 1000 units?
4. What is the total cost if the company decides to place 200 orders per year?
5. Indicate a strategy to minimize both the cost of ownership and handover?
Proposed correction:
1. The cost of ownership is calculated using the formula Cost of Ownership = (Q/2)x C x i. Thus, with an order of 1000 pains au chocolat at €0.20 per unit, the cost of ownership is ((1000/2) x €0,20 x 5%) = €50.
2. The cost of placing is done according to the formula Cost of Placing = (D/Q) x S. If we have 200 orders per year for a demand of 200 units, the cost of placing would therefore be ((000 /200) x000 €) = 200 €.
3. The total cost is the sum of the cost of ownership and the cost of handover. If we order 1000 units, the total cost would be €50 (cost of ownership) + €50 (cost of handover) = €000.
4. With 200 orders per year, the cost of placing would be €50 and the cost of ownership would be ((000/200) /000 x €200 x 2%) = €0,20. So the total cost would be €5.
5. To minimize the total cost, the company should find a balance between the number of orders to be placed and the quantity per order. Too high an order quantity increases the carrying cost, while too high a number of orders increases the placing cost. A careful analysis of the different costs will help to find the right balance.
Summary of Formulas Used:
| Formulas | Description |
|---|---|
| Cost of Ownership = (Q/2)x C xi | Formula to calculate the cost of possession, where Q is the order quantity, C is the cost per unit and i is the interest rate. |
| Cost of Passing = (D/Q) x S | Formula to calculate the cost of ordering, where D is the annual demand, Q is the quantity per order and S is the cost per order. |
| Total Cost = Cost of Ownership + Cost of Transfer | Formula to calculate the total cost, which is the sum of the cost of possession and the cost of ordering. |