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Chapter 4: 4DQ (page 405)

Explain the relationship between inventory turnover and purchasing needs.

Short Answer

Expert verified

There is direct relationship between the inventory turnover and purchasing needs. When the inventory turnover ratio is higher, purchasing need also become higher.

Step by step solution

01

Definition

Inventory turnover is the ratio which shows the number of units or quantity of inventory sold or replaced by the company in a particular period.

02

Purchasing needs and inventory relationship

Purchasing actions are required to guarantee that necessary materials are obtained quickly and affordably. In a manufacturing company where significant quantities of raw materials and components must be procured regularly, a purchasing team is significant.

The demand for purchases and replacement increases in direct proportion to the inventory turnover rate. In addition to lowering the cost of carrying inventory, quickly turning inventory makes it considerably easier to predict future needs. The better your inventory turnover rate, the quicker your business can sell its products, and the greater the likelihood of a market for those products.

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Most popular questions from this chapter

Question: Sherwin Williams will receive \(18,500 a year for the next 25 years as a result of a picture he has painted. If a discount rate of 12 percent is applied, should he be willing to sell out his future rights now for \)165,000?

Katie Pairy Fruits Inc. has a \(1,000 20-year bond outstanding with a nominal yield of 15 percent (coupon equals 15% x \)1,000 5 \(150 per year). Assume that the current market required interest rate on similar bonds is now only 12 percent.

a. Compute the current price of the bond.

b. Find the present value of 3 percent x \)1,000 (or \(30) for 20 years at 12 percent. The \)30 is assumed to be an annual payment. Add this valueto $1,000.

c. Explain why the answers in parts a and b are basically the same. (There is a slight difference due to rounding in the tables.)

Explain how the collections and purchases schedules are related to the borrowing needs of the corporation

Murray Motor Company wants you to calculate its cost of common stock. During the next 12 months, the company expects to pay dividends (D1) of \(2.50 per share, and the current price of its common stock is \)50 per share. The expected growth rate is 8 percent.

a. Compute the cost of retained earnings (Ke). Use Formula 11-5.

b. If a $3 flotation cost is involved, compute the cost of new common stock (Kn). Use Formula 11-6.

Dixie Dynamite Company is evaluating two methods of blowing up old buildings for commercial purposes over the next five years. Method one (implosion) is relatively low in risk for this business and will carry a 12 percent discount rate. Method two (explosion) is less expensive to perform but more dangerous and will call for a higher discount rate of 16 percent. Either method will require an initial capital outlay of \(75,000. The inflows from projected business over the next five years are shown next. Which method should be selected using net present value analysis?

Year Method 1 Method 2

1 .................................... \)18,000 $20,000

2 .................................... 24,000 25,000

3 .................................... 34,000 35,000

4 .................................... 26,000 28,000

5 .................................... 14,000 15,00
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