You believe that it is reasonable to assume that your trade area will encompass about 25

square miles. The city planning department has told you that within this area the population
density is 1,157 people per square mile. You conservatively estimate that 40 percent of
these individuals will visit your store an average of 4 times annually and that 85 percent will
purchase something on a typical visit. You expect them to purchase an average of $25 per
visit. Information from industry sources suggests that drugstores do more business in the fall
and winter.
In fact, you expect sales during each of months of November, December, January, and
February to be 10 percent of your annual volume. The remaining eight months will share
equally the 60 percent of remaining sales. You believe that for your business to be profitable
you need to have a beginning of month inventory to sales ratio of 3.0 for October through
November and 2.5 for the remaining months.
You want to plan your beginning-of-month inventory for each of the next 12 months. You also
want to begin the first month of your second year of business with $250,000 in inventory at
retail prices.
Please, compute the beginning of the month inventory for each of the next 12 months.
Lets look at the few simple equations we will need to determine the new drugstores total
sales.
Total Number of consumers in the trading area:
(trading area)*(population/sq. mile)
(25)*(1,157) = 28,925
Total Number of Transactions at the Store:
(# of consumers in trading area)*(penetration level)*(# of visits/year)*(closure rate)
(28,925)*(.40)*(4)*(.85) = 39,338
Total Sales:
(# of transactions)*(average sale)
(39,338)*($25) = $983,450
Now lets look at monthly sales and the BOM inventory requirements:
January
Monthly sales = (total sales)*(planned percentage for the month)
BOM inventory = (planned sales)*(inventory-to-sales ratio)
($983,450)*(10%) = $98,345
($98,345)*(2.5x) = $245,862.50
February
Monthly sales = (total sales)*(planned percentage for the month)
BOM inventory = (planned sales)*(inventory-to-sales ratio)
($983,450)*(10%) = $98,345
($98,345)*(2.5x) = $245,862.50
March
Monthly sales = (total sales)*(planned percentage for the month)
BOM inventory = (planned sales)*(inventory-to-sales ratio)
($983,450)*(.075) = $73,758.75
($73,758.75)*(2.5x) = $184,396.88

April
Monthly sales = (total sales)*(planned percentage for the month)
BOM inventory = (planned sales)*(inventory-to-sales ratio)
($983,450)*(.075) = $73,758.75
($73,758.75)*(2.5x) = $184,396.88
May
Monthly sales = (total sales)*(planned percentage for the month)
BOM inventory = (planned sales)*(inventory-to-sales ratio)
($983,450)*(.075) = $73,758.75
($73,758.75)*(2.5x) = $184,396.88
June
Monthly sales = (total sales)*(planned percentage for the month)
BOM inventory = (planned sales)*(inventory-to-sales ratio)
($983,450)*(.075) = $73,758.75
($73,758.75)*(2.5x) = $184,396.88
July
Monthly sales = (total sales)*(planned percentage for the month)
BOM inventory = (planned sales)*(inventory-to-sales ratio)
($983,450)*(.075) = $73,758.75
($73,758.75)*(2.5x) = $184,396.88
August
Monthly sales = (total sales)*(planned percentage for the month)
BOM inventory = (planned sales)*(inventory-to-sales ratio)
($983,450)*(.075) = $73,758.75
($73,758.75)*(2.5x) = $184,396.88
September
Monthly sales = (total sales)*(planned percentage for the month)
BOM inventory = (planned sales)*(inventory-to-sales ratio)
($983,450)*(.075) = $73,758.75
($73,758.75)*(2.5x) = $184,396.88
October
Monthly sales = (total sales)*(planned percentage for the month)
BOM inventory = (planned sales)*(inventory-to-sales ratio)
($983,450)*(.075) = $73,758.75
($73,758.75)*(3.0x) = $221,276.25
November
Monthly sales = (total sales)*(planned percentage for the month)
BOM inventory = (planned sales)*(inventory-to-sales ratio)
($983,450)*(10%) = $98,345
($98,345)*(3.0x) = $295,035
December
Monthly sales = (total sales)*(planned percentage for the month)
BOM inventory = (planned sales)*(inventory-to-sales ratio)
($983,450)*(10%) = $98,345
($98,345)*(2.5x) = $245,862.50