Question

A company has an average inventory balance (over a year) of $30,000. The company's annual cost of sales are $360,000. Days inventory on hand is a metric that measures how much, on average and stated in days of use, inventory a business needs to keep on hand to meet demand given its particular production technique. What is the company's average days inventory on hand (DIOH) Select one: O a. Since on average, $30,000 of inventory is on-hand, and we use up (Cost of Sales) $360,000 of inventory in one year, this means that 1/12 (30/360) of annual inventory remains, on average, in the warehouse. Since 1/12 of a year is one month, it must be the case that DIOH is 30 days. So on average we need to keep 30 days of inventory on-hand in order to service our customers given our particular production technique/technology (our process). O b. Since 30/360 = 1/12, DIOH= 1/12. O C. Since 360/30 = 12, DIOH= 12. O d. None of the above.

Answer 1

1)

Days of Inventory on Hand(DIOH) is calculated by given formula

Days of Inventory on hand = (Average Inventory/Annual Cost of sales)* Number of days

Average Inventory = $30,000

Annual cost of sales = $360,000

Therefore DIOH = ($30,000 / $360,000) * 360 days

= 30 days

Therefore option 1 is correct.

2)

Day Sales Outstanding(DSO) is calculated by given formula

Day Sales Outstanding = (Average Accounts Receivable/Annual sales)* Number of days

Average Accounts Receivable = $30,000

Annual sales = $360,000

Therefore DSO = ($30,000 / $360,000) * 360 days

= 30 days

Therefore option 1 is correct.