A company’s Cost of Goods Sold (COGS) for the 1st quarter of 2016 was $2,200,000
ID: 464368 • Letter: A
Question
A company’s Cost of Goods Sold (COGS) for the 1st quarter of 2016 was $2,200,000. In addition, on January 1st the company held $375,000 in inventory and on March 31st it held $505,000.
1. What was the company's Average Inventory Investment for the 4th quarter of 2015?
b. How often did the company turn its inventory in the 1st quarter of 2016?
c. Assume the company expects to increase COGS in the 2nd quarter of 2016 by 15% (i.e. $2,200,000+15%). In addition, management wants to double their inventory turns in the 2nd Quarter of 2016. What would the company's ending inventory need to be on June 30, 2016?
A company’s Cost of Goods Sold (COGS) for the 1st quarter of 2016 was $2,200,000. In addition, on January 1st the company held $375,000 in inventory and on March 31st it held $505,000.
1. What was the company's Average Inventory Investment for the 4th quarter of 2015?
b. How often did the company turn its inventory in the 1st quarter of 2016?
c. Assume the company expects to increase COGS in the 2nd quarter of 2016 by 15% (i.e. $2,200,000+15%). In addition, management wants to double their inventory turns in the 2nd Quarter of 2016. What would the company's ending inventory need to be on June 30, 2016?
Explanation / Answer
A company’s Cost of Goods Sold (COGS) for the 1st quarter of 2016 was $2,200,000. In addition, on January 1st the company held $375,000 in inventory and on March 31st it held $505,000.
COGS for the 1st quarter of 2016 = $2,200,000
Beginning inventory for the 1st quarter of 2016 = $375,000
Ending inventory for the 1st quarter of 2016 = $505,000
Average inventory for the 1st quarter of 2016 = (Beginning inventory + Ending inventory)/2
= (375000 + 505000)/ 2
= $440,000
Average investment in inventory for the 1st quarter of 2016 = $440,000
1. What was the company's Average Inventory Investment for the 4th quarter of 2015?
Assume the beginning inventory for 4th quarter of 2015 was zero.
The ending inventory of 4th quarter of 2015 = Beginning inventory for the 1st quarter of year 2016 = $375,000
Average Inventory investment for the 4th quarter of 2015 = (0 + 375000)/2 = $187,500
b. How often did the company turn its inventory in the 1st quarter of 2016?
Inventory turnover ratio = COGS/average inventory investment for 1st qrt of 2016
Inventory turnover ratio = $2,200,000/$440,000 = 5
The company turns its inventory 5 times in the 1st quarter of 2016.
c.
Assume the company expects to increase COGS in the 2nd quarter of 2016 by 15% (i.e. $2,200,000+15%). In addition, management wants to double their inventory turns in the 2nd Quarter of 2016. What would the company's ending inventory need to be on June 30, 2016?
COGS for the 2nd quarter of 2016 = $2,200,000 x (1 + 0.15) = $2,530,000
Inventory turnover for 2nd quarter = 2 x inventory turnover in 1st quarter = 2 x 5
Inventory turnover for 2nd quarter = 10 times
Inventory turnover ratio = COGS/average inventory investment for 2st qrt of 2016
Average inventory investment for 2st qrt of 2016 = COGS/inventory turnover ratio
= 2,530,000/10
Average inventory investment for 2st qrt of 2016 = 253,000.
Average inventory for the 2st quarter of 2016 = (Beginning inventory + Ending inventory)/2
Beginning inventory for the 2nd quarter of 2016 = Ending inventory for the 1st quarter of 2016
= $505,000
Average inventory = (Beginning Inventory – Ending inventory )/2
Ending inventory = Beginning Inventory – 2 x Average inventory
Ending inventory = 505000 – 2 x 253000
Ending inventory for 2nd quarter of 2016 = -1000 units
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