Question

Sarah's Smart Shop has an inventory turnover ratio of 3 times per year and an average inventory of $156,000. If Sarah could manage her inventory better and increase the number of turnovers to the industry average of 6 times per year, what average inventory would she need to generate the same level of sales?

Answer 1

Answer:

The formula for inventory turnover ratio is

Cost of goods sold/ Average inventory. So we can put numbers in the formula and find the cost of good sold for the company.

Inventory turnover ratio= cost of goods sold/Average Inventory

3= cost of goods sold/ 156,000

156,000*3= cost of goods sold

Cost of goods sold = 468,000

Now to find out what the average inventory needs to be for the inventory turnover ratio to be 6 and cost of goods sold to be 468,000 we will put these 2 numbers in the formula in order to find the average inventory.

6= 468,000/Average Inventory

Average Inventory = 468,000/6= 78,000

She would need average inventory levels of $78,000 to generate the same level of sales and have an inventory turnover ratio of 6.

Explanation: