8BE_b Answer each of the questions in ... [FREE SOLUTION]

Chapter 24: 8BE_b (page 1447)

Answer each of the questions in the following unrelated situations.
b) A company had an average inventory last year of $200,000 and its inventory turnover was 5. If sales volume and unit cost remain the same this year as last and inventory turnover is 8 this year, what will average inventory have to be during the current year?

Short Answer

Expert verified

The average inventory is $125,000.

Step by step solution

Meaning Inventory Turnover Ratio

The inventory turnover ratio can be found by dividing the cost of goods sold by average inventory. It is a useful indicator of a company's ability to convert inventory into sales.

Determining the average inventory during the current year

$\begin{array}{rcl} Cost of goods sold & = & Average inventory 脳 Inventory turnover \\ = & $ 200, 000 脳 5 \\ = & $ 1, 000, 000 \\ Inventory turnover ratio & = & \frac{Cost of goods sold}{Average inventory} \\ = & \frac{$ 1, 000, 000}{8} \\ = & $ 125, 000 \end{array}$

Hence, the average inventory = $125,000

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	A	B	C	D	E
Sales revenue	\(40,000	\)75,000	\(580,000	\)35,000	\(55,000
Cost of goods sold	19,000	50,000	270,000	19,000	30,000
Operating expenses	10,000	40,000	235,000	12,000	18,000
Total expenses	29,000	90,000	505,000	31,000	48,000
Operating profit (loss)	\)11,000	\((15,000)	\)75,000	\(4,000	\)7,000
Identifiable assets	\(35,000	\)80,000	\(500,000	\)65,000	\(50,000

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Short Answer

Step by step solution

Meaning Inventory Turnover Ratio

Determining the average inventory during the current year

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