ABC Analysis
| Net Present Value (Chapter 7) | ABC Analysis (chapter 12) | |||||||||||||||||
| Discount Rate | Year | Investment A | Investment B | Investment C | ||||||||||||||
| 10% | 0 | ($2,20,000) | ($3,20,000) | ($1,20,000) | Item | Annual Demand | Cost per Unit | Revenue | Ratio | Category | ||||||||
| 1 | $50,000 | $1,00,000 | $30,000 | shirts | 700 | 2000 | 1400000 | 36.27% | A | |||||||||
| 2 | $40,000 | $2,00,000 | $40,000 | T-shirts | 1000 | 800 | 800000 | 20.73% | A | 77.72% | ||||||||
| 3 | $60,000 | $75,000 | $10,000 | Trousers | 400 | 1000 | 400000 | 10.36% | A | |||||||||
| 4 | $70,000 | $50,000 | $20,000 | Pullovers | 200 | 2000 | 400000 | 10.36% | A | |||||||||
| 5 | $40,000 | $1,40,000 | $40,000 | Bras | 3000 | 100 | 300000 | 7.77% | B | |||||||||
| NPV | ($23,760.92) | $1,13,626.62 | ($13,659.15) | Shorts | 4000 | 50 | 200000 | 5.18% | B | 18.13% | ||||||||
| wig caps | 5000 | 40 | 200000 | 5.18% | B | |||||||||||||
| The NPV for investment A is less than zero hence it is not an ideal project for XYZ to invest in. On the other hand, the NPV for investment B is greater than zero hence it is an ideal project for XYZ select. Th NPV for investment C is also less than zero as such this project should also be avoided. | Boxers | 7000 | 10 | 70000 | 1.81% | C | ||||||||||||
| Socks | 10000 | 5 | 50000 | 1.30% | C | |||||||||||||
| Underwears | 20000 | 1 | 20000 | 0.52% | C | 4.15% | ||||||||||||
| Hats | 10000 | 2 | 20000 | 0.52% | C | |||||||||||||
| Total Sum | 3860000 | |||||||||||||||||
| The higher the ratio between individual item revenue and total revenue the higher the revenue, and lower the inventory. Therefore, a ration of 36.27% implies the inventory is very smaller but the Revenue from this item is very high. Therefore, the items in category A that will generate the highest revenue with the lowest inventory are shirts, T-shirts, trousers, and pullovers. An the items in category B with middle revenue and invetory are bras, shorts, and wig caps. An the items in category C with the lowest revenue and high invetory are boxers, socks, underwears, and hats. Hence, the items that XYZ should focus more on are shirts, T-shirts, trousers, and pullover. | ||||||||||||||||||
