Question

A company reported the following data:

      

	Year 1	Year 2
Cost of goods sold	$317,500	$279,100
Average inventory	72,000	93,000

Required:

 1. Calculate the company's merchandise inventory turnover for each year,

 2. Comment on the company's efficiency in managing its inventory. 

Answer 1

1.

For year 1

Merchandise inventory turnover = Cost of goods sold/ Average inventory

= 317,500/72,000

= 4.41 times ( round off to two decimals)

For year 2

Merchandise inventory turnover = Cost of goods sold/ Average inventory

= 279,100/93,000

= 3.00 times ( round off to two decimals)

2.

Inventory turnover has decreased in year 2. Decrease in inventory turnover indicates that the company is not managing its inventory efficiency.

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