Regression and inventories Charlie\'s Cycles Inc. has $170 million in sales. The
ID: 2383259 • Letter: R
Question
Regression and inventories
Charlie's Cycles Inc. has $170 million in sales. The company expects that its sales will increase 10% this year. Charlie's CFO uses a simple linear regression to forecast the company's inventory level for a given level of projected sales. On the basis of recent history, the estimated relationship between inventories and sales (in millions of dollars) is as follows:
Inventories = 13 + 0.1060(Sales)
a. Given the estimated sales forecast and the estimated relationship between inventories and sales, what are your forecasts of the company's year-end inventory level? Enter your answer in millions. For example, an answer of $25,000,000 should be entered as 25. Round your answer to two decimal places.
$ _____ million
b. What are your forecasts of the company's year-end inventory turnover ratio? Round your answer to two decimal places.
Explanation / Answer
Answer:a
Sales at the beginning of year = $170 million
Expected growth in sales = 10%
Expected sales at the end of year = Sales at the beginning of year*(1+Expected growth rate)
= $170*(1+10%)
= $187 million
The estimated relationship between inventories and sales (in millions of dollars) is:
Inventories = $13 + 0.1060(Sales)
Inventory at the beginning of year = $13+ 0.1060*$170
= $31.02 million
Inventory at the end of year = $13 + 0.1060*$187
= $32.822 million
Therefore, company's year-end inventory level is $32.822 million.
Answer:b Inventory turnover ratio can be calculated as:
Inventory turnover ratio = Sales/Average Inventory
Average Inventory = (Beginning Inventory +Closing Inventory)/2
Average Inventory=($31.02+$32.822)/2
=$31.921
Inventory turnover ratio=$187/$31.921
=5.86 times