Formula to solve: As a new employee of company XYX you have been assigned to a team that is charged with reducing the amount of inventory. You believe that a new software program can be developed which would reduce inventory by 50%. The software program costs $25,000. COGS was $10,000,000 and inventory turns are 5 times (calculated using COGS). How much inventory does XYX have? Does it make economic sense to purchase the software?
Step 1: COGS/Inventory Turn = Inventory
Step 2: Inventory x Amount Inventory is reduced by
Step 3: Look at what it currently costs if answer to step 2 is more then don't buy if answer to step 2 is less than buy