Assignment: Materials Management

You must show all work in all problems. You will receive zero credit for providing only the answer.

1. The cost of manufacturing (direct material and direct labor) is 70% of sales. Profit is 10% of sales. You should now be able to determine the remaining overhead (fixed costs). Determine the profit improvement if, through better planning and control, the cost of manufacturing was reduced from 70% of sales to 65% of sales.

2. In the above problem, how much would sales need to increase to achieve the same increase in profits?

3. On average, a firm has a 6 week lead time for work-in-process, and annual cost of goods sold is $10 million. Assuming that the firm operates 50 weeks per year:

a. What is the value of the work-in-process?
b. If the lead time could be reduced to 4 weeks, what would be the reduction in WIP?

4. A firm has anaverage 8 week lead time for work-in-process, and annual cost of goods sold is $20 million. Assuming the firm operates 50 weeks per yearand WIP = ½ of final inventory value:

a. What is the value of the work-in-process?
b. If the lead time could be reduced to 6 weeks, and the annual cost of carrying inventory is 20% of the inventory value, what would be the annual savings?

5. ABC Logistics sales are $10 million. The company spends $4 million for direct materials purchases, $3 million for direct labor purchases. Overhead is $2 million and profit is $1 million. Direct labor and direct materials vary with sales, but overhead (fixed costs) does not. The company wants to doubleits profit.

a. By how much should the firm increase annual sales?
b. By how much should the firm decrease material costs?
c. By how much should the firm decrease labor costs?

6. If the cost of manufacturing (direct materials and direct labor) is 65% of sales and profit is 15% of sales, what is the new profit percentage if the direct costs for manufacturing were reduced from 65% to 60%?