Inventory Management Exercises with Answers

Welcome to this article aimed at helping you with exercises on inventory management 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 inventory management with corrections cover storage cost, transfer cost, possession cost, calculation of alert stock, minimum stock.

Gourmet Flavor Application

States :

Saveur Gourmande is a company specializing in the sale of high-quality food products. You are the newly hired inventory manager and you must make a strategic decision regarding the management of one of the company's best-selling products, an olive oil from Greece. The following information is available:

– Cost of purchasing olive oil (unit): €15.
– Cost of placing an order: €50.
– Inventory holding cost (annual unit): 20% of the acquisition cost.
– Estimated annual consumption: 6000 units.

Work to do :

1) Calculate the total cost of inventory considering only the acquisition cost.
2) Determine the total annual ordering cost assuming the company places one order every week.
3) Calculate the total annual holding cost.
4) Calculate the total cost of inventory management.
5) Propose a strategy to reduce inventory management costs.

Proposed correction:

1) Total inventory cost equals unit acquisition cost multiplied by the number of units.
So, Total Cost = Acquisition Cost (unit) x Annual Consumption
Total cost = €15 x €6000 = €90

2) The total annual placement cost is equal to the placement cost per order multiplied by the number of orders per year.
Knowing that there are 52 weeks in a year, Total Cost of Placement = Cost of Placement (Order) x Number of Orders per Year
Total cost of procurement = €50 x 52 = €2

3) The total annual holding cost is obtained by multiplying the unit holding cost by the number of units.
So, Holding Cost = Unit Holding Cost x Annual Consumption
Cost of ownership = 20% of €15 x 6000 = €18

4) Total inventory management cost is the sum of total inventory cost, transfer cost and holding cost.
So, Total Management Cost = Total Cost + Total Handover Cost + Holding Cost
Total management cost = €90 + €000 + €2 = €600

5) To reduce inventory management costs, the company might consider optimizing the size of ordered lots using, for example, the Wilson formula to minimize both placing and holding costs.

Summary of Formulas Used:

– Total inventory cost = Acquisition cost (unit) x Annual consumption
– Total annual placement cost = Placement cost (order) x number of orders per year
– Total annual holding cost = Unit holding cost x Annual consumption
– Total inventory management cost = Total inventory cost + Total annual transfer cost + Total annual holding cost

Local Flavors Application

States :

Les Saveurs du Terroir is a delicatessen that sells artisanal products from all over France. They recently opened their doors and need help managing their inventory of products. Here is some information you have according to their inventory management system:

– The annual storage cost per unit of product is €2.
– The cost of placing an order is €50.
– The annual demand for one of its flagship products, thyme honey, is 1000 jars.
– The unit purchase price of thyme honey is €5 excluding VAT.

Work to do :

1. Calculate the total annual storage cost for thyme honey.
2. Calculate the optimal number of orders to place per year for thyme honey.
3. Calculate the optimal quantity to order for each order.
4. Calculate the total annual cost of ordering thyme honey.
5. Estimate the safety stock considering that demand can fluctuate by plus or minus 10%.

Proposed correction:

1. The total annual cost of storing thyme honey is: annual storage cost per unit x annual demand = €2 x 1000 = €2000.

2. The optimal number of orders (N) in the year is defined by the formula: N = ?(2DS/H), where D is the annual demand, S is the cost of placing orders and H is the unit storage cost. N = ?(2 x 1000 x 50 ÷ 2) = approximately 32 orders. Therefore, the company should place approximately 32 orders per year for this product.

3. The optimal quantity to order at each order placement (Q) would be the annual demand divided by the optimal number of orders. Q = 1000 ÷ 32 = approximately 31 jars.

4. The total annual cost of ordering thyme honey is: ordering cost x number of annual orders = €50 x 32 = €1600.

5. Safety stock is an estimate of the fluctuation in demand. If demand can fluctuate by plus or minus 10%, then safety stock is 10% of annual demand: 10/100 x 1000 = 100 pots.

Summary of Formulas Used:

1. Total annual storage cost = annual storage cost per unit x annual demand
2. Number of annual orders = ?(2DS/H)
3. Optimal quantity to order = annual demand / number of annual orders
4. Total annual ordering cost = ordering cost x number of annual orders
5. Safety stock = fluctuation percentage x annual demand

Textile Elegance Application

States :

We are in the company Textile Élégance, a manufacturer of high-end textile products, mainly sheets, blankets and clothing for homes. One of the company's flagship products is a premium merino wool blanket. According to the data available at the end of the year, the company started with an initial stock of 1 units of merino wool blankets, with a unit price excluding VAT of €000.

During the year, the company carried out the following transactions:

1. Purchase of 800 units at a unit cost of €45 excluding VAT.
2. Purchase of 1 units at a unit cost of €000 excluding VAT.
3. Sale of 2 units at a unit price of €000 excluding VAT.

All transactions are subject to a VAT rate of 20%.

Work to do :

1. What was the cost of goods sold (COGS) based on the weighted average cost (WAC) method?
2. Calculate the company's ending inventory using the weighted average cost method.
3. What was the pre-tax margin on this sale of blankets using the CMV calculated previously?
4. What is the value of the stock remaining in the company after the sale of these hedges using the CMP method?
5. What is the percentage margin rate based on CMV?

Proposed correction:

1. To calculate COGS using the CMP method, we first add the total number of items purchased to the beginning inventory: 1 units + 000 units + 800 units = 1 units. Then, we calculate the total value of the inventory by adding the value of the items in the beginning inventory and those purchased: (000 units x $2) + (800 units x $1) + (000 units x $50) = $800. Next, we calculate the weighted average cost per unit: $45 ÷ 1 units = $000. We then multiply this average cost by the number of items sold to get the COGS: $40 x 127 units = $000.

2. We multiply the weighted average cost per unit by the number of items remaining in stock to obtain the ending stock: €45,36 x 800 units = €36.

3. We subtract the CMV from the total sales to obtain the margin: (2 units x €000) – €100 = €90.

4. As we calculated previously, the value of the stock remaining in the company after these sales is €36.

5. To calculate the margin rate, we divide the margin by the total sales, then multiply by 100 to get a percentage: (€109 ÷ (280 units x €2)) x 000 = 100%.

Summary of Formulas Used:

– Weighted average cost per unit = Total inventory cost ÷ Total number of units
– Cost of goods sold (COGS) = Weighted average cost per unit x Number of units sold
– Final inventory = Weighted average cost per unit x Number of units remaining
– Margin = Total sales – CMV
– Margin rate = (Margin ÷ Total sales) x 100

The Corner Bakery App

States :

Boulangerie du Coin is a family business known for its baked goods and pastries. It has recently expanded its business by also offering grocery products to its customers. The manager of the bakery has hired you so that she can better manage her inventory and improve her profits. You are provided with the following information: The purchase price excluding tax of the flour is €1/kg. The starting stock is 500 kg. The inflows during the period are 3000 kg. The outflows are 2800 kg. The selling price excluding tax of the bread, using 1 kg of flour, is €3.

Work to do :

1. Calculate the ending stock of flour.
2. Calculate the cost of goods sold.
3. Calculate the margin on variable cost.
4. Calculate the margin rate.
5. Calculate the mark rate.

Proposed correction:

1. The final stock of flour is: Initial stock + Inputs – Outputs = 500 kg + 3000 kg – 2800 kg = 700 kg.

2. The purchase cost of the goods sold is the purchase price per unit multiplied by the quantity sold: Purchase cost = Purchase price excluding tax x Quantity sold therefore Purchase cost = €1/kg x 2800 kg = €2800.

3. The contribution margin is calculated by subtracting the purchase cost of goods sold from the net sales: Contribution margin = Net sales – Purchase cost of goods sold. In this example, the net sales is 2800 kg x €3/kg = €8400. Therefore, the contribution margin is €8400 – €2800 = €5600.

4. The margin rate is calculated using the formula: Margin rate = (Margin on variable cost / Cost of goods sold) x 100. In our case: Margin rate = (€5600 / €2800) x 100 = 200%.

5. The markup rate is calculated as: Markup rate = (Variable cost margin / Net sales) x 100. So in our case: Markup rate = (€5600 / €8400) x 100 = 66,67%.

Summary of Formulas Used:

1. Final Stock = Initial Stock + Inputs – Outputs
2. Cost of goods sold = Purchase price excluding VAT x Quantity sold
3. Margin on variable cost = Net sales – Cost of goods sold
4. Margin rate = (Contribution margin / Cost of goods sold) x 100
5. Markup rate = (Margin on variable cost / Turnover excluding tax) x 100

The above mentioned formulas are the fundamentals for understanding sales management accounting operations and inventory controls.

Application La Belle Etoile SARL

States :

You work for the company La Belle Etoile SARL, a business specializing in the sale of electronic products. The company recently acquired a new inventory management system. The purchase price excluding tax of a particular product is €200 and the sales price excluding tax is €270.

1. In September, the company sold 500 units of this product.
2. In October, the number of units sold increased by 15%.
3. In November, sales increased by another 25% compared to October.
4. In December, following Black Friday and the end-of-year holidays, sales increased by 40% compared to November.

La Belle Etoile SARL aims to maintain a safety stock equivalent to 20% of the previous month's sales. VAT is 20%.

Work to do :

1. Calculate the unit margin.
2. Calculate the overall margin for each month.
3. Calculate margin rate and brand rate.
4. Calculate how many units the company must order each month to maintain safety stock?
5. Calculate the sales price including tax.

Proposed correction:

1. The unit margin is the difference between the selling price excluding tax (STP) and the purchasing price excluding tax (PP). Therefore, Unit margin = STP – PP = €270 – €200 = €70

2. The overall margin is the product of the unit margin and the quantity sold. For each month:

– September: Overall margin = Unit margin x Quantity sold = €70 x 500 = €35
– October: Overall margin = €70 x (500 x 1.15) = €40
– November: Overall margin = €70 x (500 x 1.15 x 1.25) = €50
– December: Overall margin = €70 x (500 x 1.15 x 1.25 x 1.40) = €70

3. The margin rate is ((PV HT – PA HT) / PA HT) x 100 = ((270 € – 200 €) / 200 €) x 100 = 35%.
The markup rate is ((PV HT – PA HT) / PV HT) x 100 = ((270 € – 200 €) / 270 €) x 100 = 25,93%.

4. The number of units to be ordered each month to maintain the safety stock level is equivalent to 20% of the previous month's sales:

– October: orders = 500 x 0.2 = 100 units
– November: orders = 500 x 1.15 x 0.2 = 115 units
– December: orders = 500 x 1.15 x 1.25 x 0.2 = 143.75 units (i.e. 144 units rounded up to the nearest unit)

5. The sales price including tax is the sales price excluding tax plus VAT. Therefore, Sales price including tax = PV excluding tax + (PV excluding tax x VAT rate) = €270 + (€270 x 20 / 100) = €324

Summary of Formulas Used:

– Unit margin = PV HT – PA HT
– Overall margin = Unit margin x Quantity sold
– Margin rate = ((PV HT – PA HT) / PA HT) x 100
– Mark rate = ((PV HT – PA HT) / PV HT) x 100
– Safety stock = Quantity sold in the previous month x 20%
– Selling price including tax = PV excluding tax + (PV excluding tax x VAT rate / 100)

TechGuru App

States :

TechGuru is looking to optimize its inventory management. Currently, it has an initial inventory of 500 units of an electronic gadget at $30 per unit. During the month, it sold 400 units and purchased 600 new units at a price of $25 per unit. The company uses the perpetual inventory method.

Work to do :

1. What is the initial stock amount in value?
2. What is the amount of the purchases (in €)?
3. What is the amount of the final stock, considering sales and purchases made?
4. Calculate the cost of purchasing the goods sold (in €).
5. Calculate the inventory turnover rate.

Proposed correction:

1. The initial stock in value is equal to the quantity in stock multiplied by the unit price, i.e. 500 units * €30 = €15.

2. The amount of purchases is equal to the quantity purchased multiplied by the unit price, i.e. 600 units * €25 = €15.

3. Ending inventory equals opening inventory plus purchases and subtracted from sales in units, multiplied by the unit price. So (500 units + 600 units – 400 units) * €25 = €17.

4. The cost of purchasing goods sold is calculated by multiplying the number of units sold by the unit purchase price, i.e. 400 units * €25 = €10.

5. The inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory = Cost of goods sold ÷ ((Opening inventory + Ending inventory) / 2). So €10 ÷ ((€000 + €15) / 000) = 17 times.

Summary of Formulas Used:

– Initial stock in value = Initial stock in units * Unit price
– Amount of purchases = Quantity purchased * Unit price
– Final stock = (Initial stock in units + Quantity purchased – Quantity sold) * Unit price
– Cost of goods sold = Number of units sold * Unit purchase price
– Inventory turnover rate = Cost of goods sold ÷ ((Initial inventory + Final inventory) / 2)

TechnoSmart Application

States :

TechnoSmart is a company specializing in the sale of electronic devices. The manager noticed an accumulation of inventory due to poor purchasing management. He then decided to optimize his inventory management and understand how the different elements can influence the total storage cost. He provides you with the following information for the current financial year:
– The average stock of electronic devices is 1 units.
– The annual storage cost per unit is €20.
– The cost of an order is €1.
– The annual quantity requested is 5 units.

Work to do :

1. Calculate the company's annual storage cost.
2. Calculate the annual cost of orders.
3. What is the company's total cost of inventory management?
4. What would be the inventory management cost if the company decided to increase its annual order to 6 units?
5. Provide a recommendation on how the company could reduce its overall inventory cost.

Proposed correction:

1. The annual storage cost is calculated by multiplying the average inventory by the storage cost per unit. Therefore, the annual storage cost is 1 units x €200/unit = €20.

2. The annual cost of orders is obtained by dividing the quantity requested annually by the quantity ordered per order, then multiplying the result by the cost per order. We therefore have 5 units ÷ 000 units/order x €1/order = €200.

3. The company's total inventory management cost is the sum of the storage cost and the ordering cost. Therefore, the inventory management cost is €24 (storage cost) + €000 (ordering cost) = €4.

4. If the company decided to increase its annual order to 6 units, the annual ordering cost would be 000 units ÷ 6 units/order x €000/order = €1. The total inventory management cost would therefore be €200 (storage cost) + €1 (ordering cost) = €000.

5. The best way to reduce the total cost of inventory management is to find a balance between the cost of carrying and the cost of ordering. This could involve reducing the size of orders (to reduce the cost of carrying) or increasing the frequency of orders (to reduce the cost of ordering).

Summary of Formulas Used:

1. Annual storage cost = Average inventory x Storage cost per unit
2. Annual cost of orders = (Quantity requested annually ÷ Quantity ordered per order) x Cost per order
3. Total inventory management cost = Storage cost + Ordering cost

UlysseSportCo application

States :

You are an inventory manager for the sports equipment sales company, UlysseSportCo. Here are some data relating to the year 2021:

– You started the year with a stock of footballs worth €10.
– During the year, you purchased €40 worth of additional footballs.
– At the end of the year, the remaining stock of footballs was €7.

Work to do :

1. Calculate the total value of the stocks of footballs purchased during the year.
2. What is the value of inventory usage during 2021?
3. What is the value of the initial stock at the beginning of the year?
4. What is the value of the closing stock at the end of the year?
5. What is the inventory variation?

Proposed correction:

1. The total value of the football inventory purchased during the year is €40. This is the total amount of the company's purchases of this item during the year.

2. The value of inventory usage during the year 2021 is calculated by subtracting the value of the final inventory from that of the initial inventory and adding to this the cost of purchases. Calculation: (initial inventory + purchases) – final inventory => (€10 + €000) – €40 = €000.

3. The value of the initial inventory at the beginning of the year is €10. This is the value of the inventory of items that the company had at the beginning of the year.

4. The value of the closing inventory at the end of the year is €7. This is the value of the inventory of items that the company has in its possession at the end of the year.

5. Inventory change is calculated by subtracting the opening inventory from the ending inventory. Calculation: Ending inventory – opening inventory => €7 – €000 = -€10. A negative value here means that the company consumed more inventory than it purchased.

Summary of Formulas Used:

1. Total value of inventory purchased = Total cost of purchases
2. Value of inventory usage = (Initial inventory + Purchases) – Final inventory
3. Initial stock = Value of stock at the beginning of the year
4. Closing stock = Value of stock at the end of the year
5. Stock variation = Final stock – Initial stock

FashioNova App

States :

You are the financial manager of FashioNova, a well-known fashion company. To optimize costs and improve the company's efficiency, you conduct an in-depth analysis of inventory management.

The following information is provided to you:

1. Opening stock of the Camilia blouse (flagship product): 500 units
2. Unit purchase price excluding VAT of the Camilia blouse: €30
3. Unit storage cost per gown and per week: €0,50
4. Safety stock required for the Camilia blouse: 200 units
5. Weekly deliveries: Monday – 150 units, Wednesday – 200 units, Friday – 100 units
6. Estimated weekly sales: Tuesday – 100 units, Thursday – 200 units, Saturday – 200 units, Sunday – 50 units

Work to do :

1. Calculate the average stock over the week.
2. Determine the stock available at the end of the week.
3. Estimate the total storage cost for the week.
4. Calculate the inventory turnover rate of the Camilia blouse for the week.
5. Assess whether safety stock is sufficient.

Proposed correction:

1. The average inventory for the week is calculated by averaging the beginning inventory and the ending inventory. The ending inventory is 500 (beginning inventory) + 450 (shipments) – 550 (sales) = 400. Therefore, the average inventory is (500 + 400) ÷ 2 = 450 units.

2. The stock available at the end of the week is 400 (ending stock) – 200 (safety stock) = 200 units.

3. The total storage cost for the week is 450 (average stock) x 0,50 (storage cost per blouse per week) = €225.

4. The inventory turnover ratio is calculated by dividing sales by average inventory. So here it is 550 (sales) ÷ 450 (average inventory) = 1,22.

5. Safety stock is sufficient if it is greater than or equal to the stock needed to cover a day's sales. The highest sales are on Thursday with 200 units sold and on Saturday with 200 units sold. Since the safety stock is 200 units, it can therefore be considered sufficient.

Summary of Formulas Used:

1. Average stock = (Initial stock + Ending stock) ÷ 2
2. Available stock = Final stock – Safety stock
3. Total storage cost = Average inventory x Storage cost per unit
4. Inventory turnover rate = Sales ÷ Average inventory
5. Safety stock ? Maximum daily sales.

BonVins App

States :

BonVins is a wine and champagne distribution company. They have a stock of 3000 bottles of 2019 Burgundy Red at a purchase price excluding tax (PA HT) of €11,00 per bottle. They plan to sell this bottle at a sales price excluding tax (PV HT) of €15,75. The current VAT rate is 20%.

Work to do :

1. Calculate the unit margin excluding tax on the sale of each bottle of 2019 Burgundy Red.
2. Calculate the margin rate for each bottle sold.
3. Calculate the markup rate for each bottle sold.
4. Calculate the overall margin if the entire inventory is sold.
5. Calculate the sales price including all taxes (PV TTC) of a bottle.

Proposed correction:

1. The unit margin excluding tax is determined by the formula: Unit Margin excluding tax = PV excluding tax – PA excluding tax. Therefore, Unit Margin excluding tax = €15,75 – €11,00 = €4,75.

2. The margin rate is determined by the formula: Margin rate = ((PV HT – PA HT) / PA HT) * 100. Therefore, Margin rate = ((€15,75 – €11,00) / €11,00) * 100 = 43,18%.

3. The markup rate is determined by the formula: Markup rate = ((PV HT – PA HT) / PV HT) * 100. Therefore, Markup rate = ((€15,75 – €11,00) / €15,75) * 100 = 30,16%.

4. The overall margin is determined by multiplying the unit margin by the quantity sold: Overall margin = Unit margin * quantity sold. Therefore, Overall margin = €4,75 x 3000 = €14.

5. The sales price including tax is determined by the formula: PV including tax = PV excluding tax + (PV excluding tax x (VAT rate/100)), therefore PV including tax = €15,75 + (€15,75 x (20/100)) = €18,90.

Summary of Formulas Used:

– Unit Margin excluding VAT = PV excluding VAT – PA excluding VAT
– Margin rate = ((PV HT – PA HT) / PA HT) * 100
– Mark rate = ((PV HT – PA HT) / PV HT) * 100
– Overall margin = Unit margin * Quantity sold
– PV incl. VAT = PV excl. VAT + (PV excl. VAT x (VAT rate/100))

OpticaUnivers Application

States :

The company OpticaUnivers is a company selling glasses and sunglasses. The company wants to optimize its inventory management by tracking its transactions made on the Channel model, one of its flagship products.

Channel purchase price excluding VAT: €100,
Channel initial stock quantity: 500 units,
Channel final stock quantity: 450 units,
Quantity purchased from Channel during the financial year: 200 units,
Quantity sold by Channel during the financial year: 250 units.

Please note: the final stock does not take into account orders awaiting receipt.

Work to do :

1. What is Channel's inventory turnover rate during the financial year?
2. What is the average storage time for Channel?
3. What is the purchase cost excluding VAT of the goods sold?
4. What is the value of Channel's final stock when purchased excluding VAT?
5. What is Channel's average stock?

Proposed correction:

1. Channel's inventory turnover rate during the financial year is calculated by the formula: Inventory turnover rate = (Quantity sold ÷ Average inventory) = 250 ÷ ((500+450) ÷ 2) = 0,54 times

2. The average storage duration for Channel is calculated by the formula: Average storage duration (in days) = 365 ÷ Inventory turnover rate = 365 ÷ 0,54 = 675 days

3. The purchase cost excluding VAT of the goods sold is calculated using the formula: Purchase cost excluding VAT of the goods sold = Quantity sold x Purchase price excluding VAT = 250 x €100 = €25

4. The value of Channel's final stock at purchase excluding VAT is calculated using the formula: Value of final stock at purchase excluding VAT = Final quantity in stock x Purchase price excluding VAT = 450 x 100 € = 45 €

5. Channel's average stock can be calculated by the formula: Average stock = (Initial stock + Ending stock) ÷ 2 = (500 + 450) ÷ 2 = 475 units

Summary of Formulas Used:

1. Inventory turnover rate = (Quantity sold ÷ Average inventory)
2. Average storage duration (in days) = 365 ÷ Inventory turnover rate
3. Cost of purchase excluding VAT of goods sold = Quantity sold x Purchase price excluding VAT
4. Final stock value at purchase excluding VAT = Final quantity in stock x Purchase price excluding VAT
5. Average stock = (Initial stock + Ending stock) ÷ 2