Question

This year, ABC had sales of $41,093,000 and an Inventory Turnover Ratio (Sales Basis) of 8.7. ABC projects that next year, its sales will grow by 10 percent while its Inventory Turnover Ratio (Sales Basis) will drop to 8.4. If that happens, what will be the total dollar change in inventory between this year and next year?

Answer 1

Solution:

This Year :

The formula for calculating the Inventory Turnover ratio is

Inventory Turnover ratio = Sales / Inventory

As per the information given in the question we have

Sales = $ 41,093,000 ; Inventory Turnover Ratio = 8.7 ; Inventory = To find

Thus applying the above values in the formula we have

8.7 = $ 41,093,000 / Inventory

8.7 * Inventory = $ 41,093,000

Inventory = $ 41,093,000 / 8.7

Inventory = $ 4,723,333.33

Thus Inventory This Year = $ 4,723,333.33

Next Year :

Inventory Turnover Ratio = 8.4

In the Next year Sales will grow by 10 % when compared to the this year

Thus Sales Next Year =This year sales * ( 1 + 0.10 )

= $ 41,093,000   * ( 1 + 0.10 )

= $ 41,093,000 * 1.10

= $ 45,202,300

Sale Next year = $ 45,202,300

Applying the above information in the formula for Inventory Turnover ratio we have

8.4 = $ 45,202,300 / Inventory

8.4 * Inventory = $ 45,202,300

Inventory = $ 45,202,300 / 8.4

Inventory = $ 5,381,226.19

Thus Inventory Next year = $ 5,381,226.19

Total dollar change in inventory between this year and next year:

Inventory This Year = $ 4,723,333.33

Inventory Next year = $ 5,381,226.19

Thus dollar change in inventory between this year and next year

= Inventory Next year - Inventory this year

= $ 5,381,226.19 - $ 4,723,333.33

= $ 657,892.86

= $ 657,893 ( when rounded off to the nearest whole number )

Thus Total dollar change in inventory between this year and next year = $ 657,893