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?
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
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