Question

9. Nancy Brown is preparing her next year's marketing plan submission for her lighter fluid line. She is aware that the company comptroller is very concerned about inventory management and has decreed that he would oppose any plan that resulted in a lower return on inventory investment than the previous year. Nancy has gathered some information: last year's inventory turn for lighter fluid was 5.2. Last year's sales at retail were $5 million. Her forecasted sales at retail are expected to be up 12 per cent. Retail margins were 35 per cent last year and she plans 38 per cent this next year. She sells direct to retailers. Her gross margin is expected to be 22 per cent as it was last year. The comptroller has suggested that she target at a stock turn of 6.75. If she reaches her turn target and if her other figures become actuals, what will be the incremental inventory of lighter fluid in dollars, and will the return on investment in inventory go up or down?

Answer 1

Given,

Particulars	Last year	Next year
inventory turnover	5.2	6.75
sales	$5 million	$5.6 million
Gross margin	22%	22%
Retail margin	35%	38%

incremental inventory can be found with the help of inventory ratio, but first need to find COGS

Last year

COGS = Sales – Gross profit

             =5 -1.1

             =$3.9 million

Next year

COGS = Sales – Gross profit

             =5.6 -1.232

             =$4.368million

now we can apply inventory turnover ratio to find inventory values from both the years:

last year :

5.2= COGS Inventory turnover =- Average inventory 3.9 - Average inventory 3.9 Average inventory=- 5.2. Average inventory=0.75

next year :

COGS Inventory turnover =- Average inventory 4.368 6.75= Average inventory 4.368 Average inventory = 4:308 6.75 Average inventory=0.647

Return on Inventory Investment is going down as compared to 75% it is now 65%