Question

Directions: Click the Case Link above and use the information provided in Hearth and Home, Part B, to answer this question: 

What effect did the change in the holding period (inventory days on hand) during 20Y3 have on Hearth and Home's financing needs? (Round your days on hand calculation to two decimal places.) 

• Financing needs decreased by approximately $33,000. 

• Financing needs increased by approximately $33,000. 

• Financing needs decreased by approximately $4,000 

• Finandng needs increased by approximately $4,000.  

 

Answer 1

in the question following details is given,

Cost of goods sold (CGS)

20Y1 = 177300

20Y2 = 2093000

20Y3 = 2467000

Total inventory is the following :

20Y1 = 417000

20Y2 = 461000

20Y3 = 547000

here, is the formula of inventory turnover ratio = cost of goods sold / inventory

20Y1 = 1773000/41000=4.25

20Y2 = 2093000/461000= 4.54

20Y3 = 2467000/547000 = 4.51

let calculate, inventory days in hand = number of days in the period / inventory turnover ratio

20Y1 = 365/4.25 = 85.88

20Y2= 365/4.54 = 80.40

20Y3 = 365/4.51 = 80.93

now, holding period in 20Y3 has increased by

(80.93-80.40) = 0.53 days compared to 20Y2

here, holding period in 20Y3 has decreased by

(85.88-80.93) = 4.93 days compared to 20Y1

cost of goods sold in 20Y3 = 2467000

cost of goods sold per day = 2467000/365

= $67.59

while the inventory holding period is increased by 0.53 days, so financing needs have been increased by (6759 * 0.53) days

= $ 3582

here, the case change of inventory holding period in 20Y3 is comparatively with 20Y2

therefore, the inventory holding period is increased from 80.40 to 80.93 .

we observed, 0.53 days. this will increase the necessity of financing from $3582 or $4000 approx.

the answer is (D) $ 4000 approx.