Final answer:
An ABC analysis categorizes items based on their value contribution to total revenue, with cutoffs determined by the cumulative value distribution. Item categorization informs inventory control and purchasing priority, with Class A items requiring strictest controls.
Step-by-step explanation:
ABC Analysis of US Metropolitan and Micropolitan Statistical Areas
When conducting an ABC analysis of the population of US Metropolitan Statistical Areas (MSAs) and Micropolitan Statistical Areas (μSAs), assuming the values represent revenue from products, we categorize items into three classes (A, B, and C) based on their importance to the business. Class A represents items that account for a large percentage of the total value but are small in number. Class B includes items that are moderate in both value and quantity. Lastly, Class C encompasses items that are large in number but low in individual value.
To determine the cutoff points for these categories, we analyze the cumulative percentage of the total value and the cumulative percentage of the total number of items. Typically, Class A items might represent around 80% of the total value but only 20% of the items. Class B might reflect the next 15% of the total value, and Class C represents the remaining 5%. However, these percentages can be adjusted based on the shape of the data and management's discretion.
The purchasing requirements for products in these different categories would differ significantly. Class A items require rigorous inventory control, more frequent review of stock levels, and high-priority management. Class B items can have a slightly relaxed control as compared to A, while Class C, being the least costly, might involve more straightforward purchasing processes and larger order quantities to achieve economies of scale.