11 Exercises on Stock Possession Rate

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

You will also find other exercises on the cost of passing and cost of ownership which will help you master the subject of inventory management.

Application: The company Binder Designer

States :

The company Concepteur de Reliures specializes in the production and sale of bindings for books. The average stock for the year is €500. The annual cost of holding the stock is €000.

Work to do :

1. What is the formula for calculating the stock holding rate?
2. How to interpret the stock possession rate?
3. Calculate the inventory holding rate for the Binder Designer company.
4. What is the annual cost of carrying inventory?
5. What is the impact of high inventory holding rate on business performance?

Proposed correction:

1. The inventory holding rate is calculated using the following formula: Inventory holding rate = (Annual inventory holding cost ÷ Average inventory) x 100.

2. The inventory holding rate measures the cost of one euro tied up in inventory as a percentage. It is used to assess the effect of the inventory level on the company's operating costs and therefore on its profitability.

3. To calculate the stock holding rate, we use the formula: Stock holding rate = (Annual stock holding cost ÷ Average stock) x 100 = (€100 ÷ €000) x500 = 000%.

4. The annual inventory carrying cost represents all costs associated with owning the inventory, such as storage costs, insurance, depreciation, etc.

5. A high inventory holding rate has a negative impact on the company's performance. This means that the company has high costs related to holding its inventory, which can reduce its profitability.

Summary of Formulas Used:

Formulas	Description
Inventory Holding Rate = (Annual Inventory Holding Cost ÷ Average Inventory) x 100	Formula used to calculate stock holding rate

Application: MCO Retail Store

States :

You are a management assistant at MCO Retail Store, a successful clothing store in your city. The company has recently decided to keep tighter control of its inventory to reduce its carrying costs.

Here is the information you have:
– Average annual purchase cost of stocks: €125
– Annual storage costs: €5
– Annual cost of depreciation: €2
– Residual value of stocks: €20

Work to do :

1. Calculate the total cost of inventory ownership.
2. Calculate the inventory holding rate.
3. What would be the inventory holding rate if depreciation increased to €3?
4. What impact would a decrease in the residual value of stocks to €15 have on the possession rate?
5. What action plan would you propose to reduce the stock holding rate of MCO Retail Store?

Proposed correction:

1. Total cost of ownership = inventory purchase cost + annual storage costs + annual depreciation costs – residual value of inventory = €125 + €000 + €5 – €000 = €2

2. Inventory holding rate = (total cost of ownership / inventory purchase cost) x 100 = (€112 / €000) x 125 = 000%

3. If depreciation increased to €3, the total cost of ownership would become €000 and the inventory holding rate would now be 113%.

4. If the residual value of inventory were to decrease to €15, the total cost of ownership would become €000 and the inventory holding rate would now be 117%.

5. To reduce the holding rate, MCO Retail Store could consider reducing storage costs, limiting depreciation (e.g. by improving inventory control), or selling its items more quickly to reduce the cost of purchasing inventory.

Summary of the formulas used:

Concept	Formulas
Total Cost of Ownership	Cost of purchasing inventory + storage costs + annual cost of depreciation – residual value of inventory
Inventory holding rate	(Total Cost of Ownership / Inventory Purchase Cost) x 100

Application: “Au Bon Panier” supermarket

States :

The supermarket "Au Bon Panier" is a local business with a fruit and vegetable section among others. The manager of the fruit and vegetable section would like to have perfect control over the management of its stocks. Currently, the supermarket has a stock of apples in reserve. The apples were purchased from the producer at a purchase price of €0,50 per unit. The cost of holding this annual stock is estimated at €2. Annual sales are estimated at 000 units.

Work to do :

1. Calculate the annual cost of holding one unit of apples in stock.
2. Calculate the apple stock possession rate.
3. Estimate the average number of days of possession for an apple.
4. If the supermarket decides to increase its annual sales of apples to 20,000 units, what would be the new stock holding rate?
5. If the annual carrying cost increases to €2, what would be the new stock carrying rate?

Proposed correction:

1. The annual cost of holding one unit of apple in stock is calculated by dividing the total annual holding cost by the total number of sales. So: €2 ÷ €000 = €16 per unit.

2. The stock holding rate is obtained by dividing the annual cost of holding a unit by the purchase price. Therefore: (€0,125 ÷ €0,5) x 100 = 25%.

3. To get the average number of days of possession for an apple, we must divide the number of days in a year by the number of annual sales. So: 365 days ÷ 16 = 000 days per apple, which is approximately 0,02281250 minutes.

4. By increasing annual apple sales to 20 units, the annual holding cost per unit of apples would be: €000 ÷ 2 = €000 per unit. The new stock holding rate would therefore be: (€20 ÷ €000) x 0,10 = 0,10%.

5. If the annual holding cost increases to €2, the annual holding cost per unit of apples would be: €500 ÷ 2 = €500 per unit. The new stock holding rate would therefore be: (€16 ÷ €000) x 0,15625 = 0,15625%.

Summary of Formulas Used:

Indicators	Packages
Annual cost of holding a unit	Total annual holding cost ÷ Total number of sales
Stock holding rate	(Annual cost of holding a unit ÷ Purchase price) x 100
Average number of days of possession for a unit	Number of days in a year ÷ Number of annual sales

Application: Bouti'Fashion clothing store

States :

Bouti'Fashion is a clothing store that has a large stock of products to adapt the offer to the demand of its customers. In order to better manage its stock, Bouti'Fashion wants to know its stock possession rate in order to evaluate its efficiency in terms of stock rotation.

In May, the store had a purchase value of goods sold (VMS) of €40. The average annual cost of carrying inventory (including financing costs, storage space costs, inventory insurance costs and inventory management costs) is €000. The average inventory over the year is €5.

Work to do :

1. Calculate the stock holding rate.
2. How to interpret this rate?
3. What is the impact of this rate on the company's margin?
4. How to improve the stock possession rate?
5. What are the risks of poor management of the stock possession rate?

Proposed correction:

1. The inventory holding rate is calculated by dividing the annual inventory holding cost by the purchase value of the goods sold, multiplied by 100. Here, this gives: (5000 ÷ 40000) x 100 = 12,5%.

2. This rate of 12,5% ​​means that the cost of holding Bouti'Fashion's stock represents 12,5% ​​of the purchase value of the goods sold. This is an indication of the efficiency of the company's stock management.

3. This rate impacts the company's margin because the higher the rate, the higher the cost of holding the stock, which reduces the company's margin.

4. To improve the inventory holding rate, the company may seek to reduce the costs associated with holding inventory (e.g. by negotiating insurance costs or optimizing storage space) or to increase the purchase value of the goods sold (e.g. by increasing sales).

5. Poor management of inventory holding rate can lead to increased costs, decreased margin, liquidity problems and even stock out if the company cannot finance its inventory. It can also lead to deterioration of the relationship with suppliers if the company is late on payments.

Summary of Formulas Used:

Formulas	Explanation
Inventory Holding Rate = (Annual Inventory Holding Cost ÷ Purchase Value of Goods Sold) x 100	This formula is used to calculate the inventory carrying rate, which represents the annual cost of carrying inventory as a percentage of sales.

Application: SuperMart

States :

SuperMart, a new supermarket, has made its debut in the city. Eager to offer the best to its customers while managing its stock efficiently, the General Manager of SuperMart has approached you for better stock management. He has therefore provided you with the following data regarding one of its main product categories:

– Unit purchase cost of the product: €5
– Cost of stock holding per unit per year: €2
– Quantity in stock: 1000
– Quantity sold in the year: 3000

Work to do :

1. Calculate the annual carrying cost of the inventory.
2. How much would the stock cost if the quantity was doubled?
3. What would be the inventory holding ratio relative to the purchase cost if the quantity in stock was doubled?
4. If SuperMart sold 4000 units per year instead of 3000 while keeping the same inventory, how would this affect the inventory holding rate?
5. What recommendation would you give to SuperMart to improve its inventory management?

Proposed correction:

1. The annual cost of stock holding is simply calculated by the following formula: Quantity in stock x Cost of holding per unit per year. Here, this gives: 1000 x 2 = €2000.

2. If the quantity were doubled (i.e. 2000 units), the stock holding cost would be: 2000 x 2 = €4000.

3. The stock holding ratio to purchase cost is calculated by the following formula: (Annual stock holding cost ÷ (Quantity in stock x Unit purchase cost)) x 100. If the quantity in stock were doubled, this would give: (4000 ÷ (2000 x 5)) x 100 = 40%.

4. If SuperMart sold 4000 units per year instead of 3000 while keeping the same quantity in stock, it would not affect the inventory holding rate because this measure is independent of the number of units sold. It is only affected by the carrying cost and the quantity in stock.

5. SuperMart is recommended to review its inventory regularly to avoid overestimation of the carrying cost. Furthermore, by increasing sales and/or reducing the stock level, the stock carrying rate could be reduced for more efficient management.

Summary of Formulas Used:

Formulas	Details
Annual inventory carrying cost	Quantity in stock x Cost of ownership per unit per year
Ownership rate	(Annual inventory carrying cost ÷ (Quantity in stock x Unit purchase cost)) x 100

Application: LuxeFurnitures Company

States :

LuxeFurnitures is a company specializing in the manufacture and sale of luxury furniture. It operates in a highly competitive market and therefore seeks to optimize its costs to increase its profit margin. In this context, it has decided to focus on its stock holding rate, a figure that it has never really taken into account before.

The following information was collected by the company on its stock of leather sofas, one of its best sellers:

– Average value of leather sofa stock: €150.
– Annual stock holding costs: €30.
– Storage costs: 6% of the annual value of the stock (including depreciation, storage space, etc.).
– Financing costs: 4% of the capital invested in the stock (the company finances the stock through a bank loan at 4%).
– An insurance rate of: 0,50%.

Work to do :

1. What is LuxeFurnitures' stock holding rate for its leather sofas?
2. How does this rate compare to those in the sector?
3. What are the factors that have the greatest impact on this rate?
4. What would be the consequences if the company decided to reduce its inventory of leather sofas by 10%?
5. What could the company do to reduce its inventory holding rate?

Proposed correction:

1. The stock holding rate is calculated by adding storage costs, financing costs and the stock insurance rate, i.e.: 6% + 4% + 0.50% = 10.5%. It is therefore 10,5%.

2. This question is more subjective and depends on the specifics of the industry. On average, the stock holding rate is usually around 30% in the luxury furniture industry. Therefore, the stock holding rate of the LuxeFurnitures company is relatively low compared to its competitors.

3. The main factors that impact the inventory holding rate are: storage costs, financing costs and insurance rate. In the case of the company LuxeFurnitures, it is the storage cost that has the greatest impact.

4. If the company reduced its inventory of leather sofas by 10%, the average value of its inventory would therefore decrease to €150 x 000% = €90. As a result, its annual inventory carrying costs would also decrease proportionally. This reduction would have the effect of reducing the company's inventory carrying rate.

5. To reduce its inventory holding rate, LuxeFurnitures could seek to optimize its storage costs (for example, by renegotiating its lease agreements or improving its inventory management to reduce depreciation), renegotiate its financing rate, or find ways to reduce its insurance rate.

Summary of Formulas Used:

Stock holding rate	Storage costs + Financing costs + Insurance rate = 10,5%
Stock value after 10% reduction	Average stock value x 90%

Application: Duval Chocolate Company

States :

Chocolat Duval is a company specializing in the manufacture of artisanal chocolates. It has a warehouse to store its raw materials and finished products. Inventory management is crucial for the company because it has a direct impact on its operating costs.

Here is some information on the company's inventory management for the year 2020:

– Cost of purchasing raw materials: €80
– Cost of maintaining stock: €5
– Value of initial stock: €15
– Final stock value: €20

Work to do :

1. Calculate the average cost of inventory for the year 2020.
2. Calculate the stock holding rate for the year 2020.
3. Explain what the stock possession rate represents.
4. How can inventory holding rate management impact the company's operating costs?
5. What are the possible ways for the company to reduce its inventory holding rate?

Proposed correction:

1. Average cost of inventory = (Initial inventory + Final inventory) ÷ 2 = (€15 + €000) ÷ 20 = €000.

2. Inventory holding rate = (Inventory holding cost ÷ Average inventory cost) x 100 = (€5 ÷ €000) x 17 ? 500%.

3. The inventory holding rate represents the percentage of the average inventory cost that is devoted to maintaining it. It is used to assess the inventory holding cost for the company.

4. Managing the inventory holding rate can impact the company's operating costs because a high rate means that the company is spending a significant portion of its resources to maintain its inventory. This has the effect of decreasing its operating margin.

5. To reduce its stock holding rate, the company can seek to optimize its stock management by minimizing the storage time of raw materials and finished products, by improving demand forecasting, or by negotiating better purchasing conditions with its suppliers.

Summary of Formulas Used:

Average cost of inventory	(Initial stock + Final stock) ÷ 2
Stock possession rate	(Inventory Holding Cost ÷ Average Inventory Cost) x 100

Application: At Pascalina's

States :

Pascalina is a company that sells ceramic handicrafts. She recently opened a small shop in the city centre. The company has experienced significant growth and has had to increase its stock of goods to meet demand. As a result, Pascalina has purchased additional stock for a total of €6 including VAT.

Pascalina sells her products at a VAT rate of 20%. The stock holding cost for the company is 5%.

Work to do :

1. Calculate the cost of purchasing the stocks excluding tax.
2. Calculate the inventory carrying cost.
3. If Pascalina plans to sell all her inventory in 6 months, what is the monthly holding rate?
4. If the inventory holding rate increases to 7%, how does this affect the inventory carrying cost?
5. How can the stock holding rate be reduced?

Proposed correction:

1. The cost of purchasing stocks excluding VAT can be calculated by dividing the cost including VAT by 1 + VAT rate, i.e. €6 ÷ 000 = €1,20.
2. The cost of holding stocks is equal to the cost of purchasing the stock excluding tax multiplied by the stock holding rate, i.e. €5 x 000 = €0,05.
3. The monthly ownership rate is equal to the ownership rate divided by the number of months or 5% ÷ 6 = 0,83% per month.
4. If the inventory holding rate increases to 7%, the inventory holding cost will also increase. This figure would then be €5 x 000 = €0,07.
5. The stock holding rate can be reduced by improving the efficiency of inventory management processes, reducing inventory levels or speeding up the inventory turnover rate.

Summary of Formulas Used:

Formulas	Description
Cost of purchasing stocks excluding VAT = Cost including VAT ÷ (1 + VAT rate)	Allows you to calculate the cost of purchasing stocks excluding tax
Inventory holding cost = Stock purchase cost excluding tax x Holding rate	Allows you to calculate the cost of carrying inventory
Monthly Ownership Rate = Ownership Rate ÷ Number of Months	Allows you to calculate the monthly ownership rate

Application: DigiTech Solutions

States :

DigiTech Solutions is a company specializing in the sale of innovative technological equipment, accessories and electronic gadgets. The company has accumulated a significant stock of a particular product – wireless headphones – and is looking for a general way to optimally manage this stock.

To do this, they need to determine the stock holding rate to help inform their decisions. They provide the following information:

– The unit purchase cost of the wireless headphones is €150.
– Over a period of one year, DigiTech Solutions sold 2000 units of this product.
– The cost of maintaining inventory is 30% of the annual purchase cost of the product.

Work to do :

1. What is the annual purchase cost of this product for DigiTech Solutions?
2. What is the cost of maintaining stock of wireless headphones?
3. Calculate the stock holding rate.
4. Determine the impact of increased sales on inventory holding rates.
5. Do you think DigiTech Solutions should seek to increase or decrease its inventory holding rate?

Proposed correction:

1. The annual purchase cost can be calculated by multiplying the unit purchase cost by the number of units sold in the year. In this case, the annual purchase cost is €150 x 2000 = €300.

2. The cost of holding inventory is 30% of the annual purchase cost. Therefore, the cost of holding inventory is 30% x €300 = €000.

3. The inventory holding rate can be calculated by dividing the inventory holding cost by the annual purchase cost. Here, the inventory holding rate is €90 ÷ €000 x 300 = 000%.

4. An increase in sales would reduce the stock holding rate because it means that fewer products remain in stock for a long period of time.

5. Ideally, DigiTech Solutions should seek to reduce its inventory holding rate. This could mean increasing sales, negotiating more favorable purchasing terms with suppliers, or improving its inventory management.

Summary of Formulas Used:

Formulas	Description
Annual purchase cost = Unit purchase cost x Number of units sold	This formula is used to calculate the total money spent on purchasing products in a year.
Inventory Holding Cost = Annual Purchase Cost x Holding Cost Rate	This formula is used to determine how much it costs to hold inventory of a product for a year.
Inventory Holding Rate = (Inventory Holding Cost ÷ Annual Purchase Cost) x 100	This formula is used to calculate the percentage that inventory carrying costs represent of the total cost of purchasing inventory.

Application: Fashion Outfit Challenge

States :

Défi Tenue Fashion is a retailer specializing in women's fashion. It has been in operation for several years and is worth focusing on controlling its costs. To improve its inventory management, it needs to calculate different indicators around its inventory. We know that the average inventory is €27 and that the inventory holding cost is 000% of the average inventory.

Work to do :

1. What is the inventory carrying cost for Défi Tenue Fashion?
2. If Défi Tenue Fashion increased its average inventory to €30, what would be the new carrying cost?
3. To what extent would increasing the average inventory impact the inventory carrying cost?
4. How could the company reduce its inventory carrying cost?
5. How does cost of ownership affect the company's financial strategy?

Proposed correction:

1. The inventory holding cost for Défi Tenue Fashion is: 0,12 x €27 = €000.

2. If Défi Tenue Fashion increased its average inventory to €30, the new carrying cost would be: 000 x €0,12 = €30.

3. Increasing the average inventory would result in increasing the inventory carrying cost. Indeed, since the inventory carrying cost is proportional to the average inventory, if the average inventory increases, the inventory carrying cost will also increase.

4. The company could reduce its inventory carrying cost by minimizing its average inventory. For example, it could implement inventory management practices such as Just-In-Time, which aims to minimize inventory by ordering products only when they are needed.

5. The cost of carrying inventory has a significant impact on the company's financial strategy. A high cost of carrying inventory means that the company is tying up a large portion of its capital in inventory, which can reduce its liquidity and ability to invest in other areas. Therefore, the company must always seek a balance between maintaining sufficient inventory to meet customer demand and minimizing the cost of carrying inventory.

Summary of Formulas Used:

Packages	Description
Inventory Carrying Cost = Carrying Cost (%) x Average Inventory	Formula to calculate inventory carrying cost based on holding rate and average inventory value.

Application: At PetitPrix

States :

PetitPrix is ​​a small business selling food products. Managing their inventory is a vital part of their daily operations. They recently conducted an inventory and provided you with the following information:

– Average stock value: €15
– Cost of goods sold (COGS): €60

You are responsible for helping PetitPrix analyze their stock holding rate.

Work to do :

1. Calculate the stock holding rate.
2. What does the inventory holding rate represent for a company?
3. How can the company reduce its inventory holding rate?
4. What consequences could a stock holding rate that is too high have?
5. What consequences could a stock holding rate that is too low have?

Proposed correction:

1. The stock holding rate is calculated as follows:
Inventory Holding Rate = (Average Inventory Value ÷ COGS) x 100
– Stock holding rate = (€15 ÷ €000) x 60 = 000%

2. Inventory carrying rate is the percentage of cost of goods sold spent on maintaining the company's average inventory. It is a measure of the effectiveness of a company's inventory management.

3. To reduce the stock holding rate, the company could seek to reduce the average stock held, for example by improving the efficiency of its stock ordering and delivery processes or by optimising stock layout.

4. Too high an inventory holding rate could lead to overcapitalization in inventory, meaning the company has a lot of money tied up in inventory that could be used elsewhere. It could also lead to a higher risk of inventory spoilage, theft, or decreased demand.

5. A low inventory holding rate, on the other hand, could mean that the company does not have enough inventory to meet demand, which could lead to stockouts and lost revenue.

Summary of Formulas Used:

Formulas	Explanation
Inventory Holding Rate = (Average Inventory Value ÷ COGS) x 100	This formula gives the inventory holding rate, which represents the efficiency of the company's inventory management.