Problem 16-9 Inventory Management Calculate the average investment in inventory
ID: 2723519 • Letter: P
Question
Problem 16-9 Inventory Management Calculate the average investment in inventory for each of the following situations. Assume a 365-day year. The firm's annual sales were $16 million, its gross profit margin was 34%, and its average age of inventory is 49 days. Round your answer to the nearest dollar. $ The firm's annual sales were $326 million, its cost of goods sold is 82% of sales, and it turns its inventory 10 times per year. Round your answer to the nearest dollar. $ The firm's annual cost of goods sold total $120 million, and it turns its inventory about every 75 days. Round your answer to the nearest dollar. $
Explanation / Answer
a.If annual sales = $ 16 million, and gross margin = 34%, Cost of goods sold = $ 16 million x ( 1- 0.34 ) = $ 10.56 million.
Inventory turnover = 365 / Average age of inventory = Cost of goods sold / Average inventory
or 365/ 49 = $ 10.56 million / Average inventory
Average investment in inventory = $ 1,417,644
b. Annual sales = $326 million Cost of goods sold = $326 million x 82% = $ 267.32 million
Inventory turnover = Cost of goods sold / Average inventory = $ 267.32 million / Average inventory = 10
Average inventory is therefore $ 26.732 million or $ 26,732,000
c. Inventory turnover = 365 / 75 = 4.87 times
Inventory turnover = Cost of goods sold / Average inventory = $ 120 million / Average inventory = 4.87
Average inventory = $ 120 million / 4.87 = $ 24, 640,657