Question

(Apparel Retailing) A large catalog retailer of fashion apparel reported $100,000,000 in revenues over the last year. On average, over the same year, the company had $5,000,000 worth of inventory in their warehouses. Assume that units in inventory are valued based on cost of goods sold (COGS) and that the retailer has a 100 percent markup on all products. a. How many times each year does the retailer turn its inventory? b. The company uses a 40 percent per year cost of inventory. That is, for the hypothetical case that one item of $100 COGS would sit exactly one year in inventory, the company charges itself a $40 inventory cost. What is the inventory cost for a $30 (COGS) item? You may assume that inventory turns are independent of the price.

Answer 1

Solution and Explanation:

calculate the times each year does the retailer turn its inventory as shown below:

COGS = revenues divide by 2

= 1000000000 divide 2 = $50000000

Inventory turns = COGS divide inventory

= 50000000 divide 500000 = 10 times per year

Hence, the number of times each year does the retailer turn its inventory is 10 times.

b. Given, that the annual inventory cost is 40% of the inventory value

calculate the cost of inventory per unit from the formula as shown below:

Cost of inventory per unit = Annual inventory cost as % divide inventory turns

= 40% divide 10 = 4%

For a $30 (COGS) itmes:

inevntory cost = 4% of $30

= 1.2

hence, the inventory cost for a $30 (COGS) is $1.2