Question

The Ajex Company has several of items they store in inventory. The table below shows the annual demand, and the item cost. Develop a logical classification for the inventory based on ABC?

Answer 1

ABC classification is used to categorize inventory based on importance. It helps businesses manage inventory effectively. The classification is done using Pareto Analysis and involves calculating the cumulative percentage of demand for each item.

Step-by-step explanation:

The ABC classification is a method used to categorize inventory based on its importance. It helps businesses manage their inventory more effectively by prioritizing items based on their value and demand. The classification is typically done using the Pareto Analysis, also known as the 80-20 rule, which states that about 20% of items account for 80% of the value or demand.

To classify the inventory based on ABC:

1. Calculate the annual demand for each item.
2. Rank the items in descending order based on their demand.
3. Calculate the cumulative percentage of total demand.
4. Assign the items to different categories based on their cumulative percentage.

Using Pareto Analysis, we can calculate the cumulative percentage:

1. Item A: 1000 units (20% cumulative percentage)
2. Item B: 800 units (40% cumulative percentage)
3. Item C: 500 units (55% cumulative percentage)
4. Item D: 300 units (65% cumulative percentage)
5. Item E: 100 units (70% cumulative percentage)
6. Item F: 80 units (75% cumulative percentage)
7. Item G: 70 units (80% cumulative percentage)
8. Item H: 50 units (85% cumulative percentage)
9. Item I: 30 units (90% cumulative percentage)
10. Item J: 20 units (100% cumulative percentage)

Based on this classification, we can categorize the items as follows:

• Category A: Item A, Item B
• Category B: Item C, Item D, Item E, Item F
• Category C: Item G, Item H, Item I, Item J