A drug retailer has two ways that he can replenish his shelf merchandise: directly from vendors or through the company's warehouse. Items with high sales volume and high replenishment quantity usually have a cost advantage if they can be purchased directly from vendors because no extra warehouse storage and handling are required. The remaining items are more efficiently handled through warehousing. The retailer has heard of the 80-20 principle and thinks that it might be a useful way of separating the product line into high and low volume groups to achieve the greatest supply economies.
Product Code Dollar Sales
10732 ........................ $ 56,000
11693 ......................... 51,000
09721 ......................... 10,000
14217 ......................... 9,000
10614 ......................... 46,000
08776 ......................... 71,000
12121 ......................... 63,000
11007 .......................... 4,000
07071 .......................... 22,000
06692 .......................... 14,000
12077 .......................... 27,000
10542 .......................... 18,000
Total .......................... $391,000
If the order size closely follows sales level, use the 80-20 principle to determine the items that should be purchased directly from vendors. Use 20 percent of the items as the break point.