Assignment: 1

Q-2.4 (a.)
Sol. Flow rate= Cost of goods sold = $50,000,000 (half of the
revenues)
Inventory = $5,000,000
Hence, we can compute floe time via Little’s Law as
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
Flow time =
𝐹𝐿𝑂𝑊 𝑅𝐴𝑇𝐸
5000000
=
50000000

= 0.1Years
1
Inventory turns =
𝐹𝑙𝑜𝑤 𝑡𝑖𝑚𝑒
1
=
0.1

= 10 turns per year.

𝐴𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑐𝑜𝑠𝑡

b) Per-unit inventory cost =
𝐴𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑠
40%
=
10

=4%
The specific inventory cost for a $30 COGS item
= $30 X 4%
Inventory cost = $1.20
Q-2.8(a)
Sol. Associates- 200 Flow time= 4 years
Managers- 60 Flow time= 6 years
Partners- 20 Flow time= 10 years

𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
Flow rate (associates) =
𝐹𝑙𝑜𝑤 𝑡𝑖𝑚𝑒
200
=
4
= 50 associates
Mt. Kinley may require 50 new MBAs each year to maintain the number
of people in the firm.

𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
b) Flow rate (Managers) =
𝐹𝑙𝑜𝑤 𝑡𝑖𝑚𝑒
60
=
6 𝑦𝑒𝑎𝑟𝑠
= 10 Managers

𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
Flow rate (Partners) =
𝑓𝑙𝑜𝑤 𝑡𝑖𝑚𝑒

20
=
10 𝑦𝑒𝑎𝑟𝑠
= 2 partners
Promotion cycle from Associate to Manager: -

𝐹𝑙𝑜𝑤 𝑟𝑎𝑡𝑒 (𝑚𝑎𝑛𝑎𝑔𝑒𝑟𝑠)

Probability of promoted at each step =
𝐹𝑙𝑜𝑤 𝑟𝑎𝑡𝑒 (𝑎𝑠𝑠𝑜𝑐𝑖𝑎𝑡𝑒𝑠)

10
=
50
= 20%
Promotion cycle from Manager to Partner: -

𝐹𝑙𝑜𝑤 𝑟𝑎𝑡𝑒 (𝑃𝑎𝑟𝑡𝑛𝑒𝑟𝑠)

Probability of promoted at each step =
𝐹𝑙𝑜𝑤 𝑟𝑎𝑡𝑒 (𝑚𝑎𝑛𝑎𝑔𝑒𝑟𝑠)

2
=
10

= 20%
Chances of New hire become a partner =
20% X 20%
= 4%

Q -2.9 (a)
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
Sol. Flow time =
𝐹𝑙𝑜𝑤 𝑟𝑎𝑡𝑒
𝐼
T=
𝐶𝑂𝐺𝑆
For Costco:-
3643
Flow time = X 365
41651
 = 31.9 days

For Walmart:-
29447
Flow time = X 365
215493
=49.8 days
(b) Costco :-

𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
Flow time =
𝐹𝑙𝑜𝑤 𝑟𝑎𝑡𝑒
3643
=
41651

=0.087 years

1
Inventory turns =
𝐹𝑙𝑜𝑤 𝑡𝑖𝑚𝑒
1
=
0.087

=11.44 turns per year

𝐴𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑐𝑜𝑠𝑡𝑠
Per-unit inventory cost =
𝐴𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑠
30%
=
11.44 𝑡𝑢𝑟𝑛𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟

= 2.62% X 5
= 0.131

Walmart:-
 29447
Flow time =
215493

=0.136years
1
Inventory turns =
0.136

= 7.35 turns per year

𝐴𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑐𝑜𝑠𝑡𝑠

Per-unit inventory cost =
𝐴𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑠
30%
=
7.33 𝑡𝑢𝑟𝑛𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟

=4.09% X 5
= 0.2045
Difference between inventory cost for $5 COGS item
for the two companies = 0.0735.