(Ratio analysis) Assuming a 360-day year, calculate what the average investment

Question

(Ratio analysis) Assuming a 360-day year, calculate what the average investment in inventory would be for a firm, given the following information in each case.

a.) The firm has sales of $600,000, a gross profit margin of 10 percent, and an inventory turnover ratio of 6.

b.) The firm has a cost-of-goods-sold figure of $480,000 and an average age of inventory of 40 days.
c.) The firm has a cost-of-goods-sold figure of $1.15 million and an inventory turnover rate of 5.

d.) The firm has a sales figure of $25 million, a gross profit margin of 14 percent, and an average age of inventory of 45 days.

Explanation / Answer

.) The firm has sales of $600,000, a gross profit margin of 10 percent, and an inventory turnover ratio of 6.
Inventory turnover ratio =Sales/Inventories = 6
So Inventory = Sales/6 = 600,000/6 = $100,000......Ans

b.) The firm has a cost-of-goods-sold figure of $480,000 and an average age of inventory of 40 days.
Average Inventory Period = (inventory x 360 days) / cost of sales.
ie Inventory = Average Inventory Period*cost of sales/360
ie Inventory = 40*480000/360 = $53333.33......Ans

c.) The firm has a cost-of-goods-sold figure of $1.15 million and an inventory turnover rate of 5.
Number of Days Inventory = 360 days / inventory turnover ratio=360/5=72 days
Average Inventory Period = (inventory x 360 days) / cost of sales.
ie Inventory = Average Inventory Period*cost of sales/360
ie Inventory = 72*$1.15M/360 = $230,000 ......Ans

d.) The firm has a sales figure of $25 million, a gross profit margin of 14 percent, and an average age of inventory of 45 days.
Profit = 14%*Sales = 14%*25M = $3.5M
So COGS = Sales - Profit = $25M-$3.5M = $21.5M
Inventory = Average Inventory Period*cost of sales/360 = 45*$21.5M/360
ie Inventory = $2,687,500

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