McDonald\'s) The following figures are taken from the 2003 financial statements
ID: 2613661 • Letter: M
Question
McDonald's) The following figures are taken from the 2003 financial statements of
McDonald's and Wendy's. ! Figures are in million dollars.
McDonald's Wendy's
Inventory $ 1 29.4 $ 54.4
Revenue 1 7, 1 40.5 3,1 48.9
Cost of goods sold 1 1 ,94 3 . 7 1 , 634.6
Gross profit 5 , 1 96.8 1 ,5 1 4.4
a. I n 2003, what were McDonald's inventory turns? What were Wendy' s inventory
turns?
b. Suppose it costs both M cDonald ' s and Wendy' s $3 (COGS) per their value meal offerings,
each sold at the same price of $4. ASSW11e that the cost of inventory for both
companies is 30 percent a year. Approximately how much does McDonald's save in
inventory cost per value meal compared to that of Wendy ' s? You may assume the
inventory turns are independent of the price.
Explanation / Answer
a.) Inventory turn is the the number of times the inventory has been turned or sold in a year
Inventory Turn also known as Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
Mcdonald's Inventory Turns = 11943.71 / 129.4 = 92.30
Wendy's Inventory Turns = 634.6 / 54.4 = 11.67
b) Cost of invenoty is the cost associate with storing and maintaining the inventory and icludes items like storage cost, taxes, insurance, opportunity costs, depreciation etc. It is calculated as a percentage of the average inventory.
Mcdonalds:
Average Inventory per value meal = Cost of Value Meal / Inventory Turnover Ratio
= 3 / 92.3 = $0.033
Inventory Cost per value meal = 30% * Average Inventory per value meal
= 0.3 * 0.033 = $0.0098
Wendy's
Average Inventory per value meal = Cost of Value Meal / Inventory Turnover Ratio
= 3 / 11.67 = $0.257
Inventory Cost per value meal = 30% * Average Inventory per value meal
= 0.3 * 0.257 = $0.0772
Saving in McDonald's inventory cost per value meal as compared to that of Wendy ' s = 0.0772 - 0.0098 = $0.0674
Saving In Percentage Terms = 0.0674 / 0.0772 = 87.3%