Fundamental Accounting Principles 22th Edition by John Wild ,Ken Shaw,Barbara Chiappetta

Exercise 1

One source of cash savings for a company is improved management of inventory. To illustrate, assume that Apple and Google both have $1 billion per month in sales of one model of smartphone in Canada, and both forecast this level of sales per month for the next 24 months. Also assume that both Apple and Google have a 20% contribution margin, their fixed costs are equal, and that cost of goods sold is the only variable cost. Assume that the main difference between Apple and Google is the distribution system. Apple uses a just-in-time system and requires ending inventory of only 10% of next month's sales in inventory at each month-end. However, Google is building an improved distribution system and currently requires 30% of next month's sales in inventory at each month-end.
Required
1. Compute the amount by which Google can reduce its inventory level if it can match Apple's system of maintaining an inventory equal to 10% of next month's sales. ( Hint: Focus on the facts given and only on the Canadian market.)
2. Explain how the analysis in part 1 that shows ending inventory levels for both the 30% and 10% required inventory policies can help justify a just-in-time inventory system. Assume a 15% interest cost for resources that are tied up in ending inventory.