ALT had $25 million in sales last year. Its cost of goods sold was $15 million and its average inventory balance was $3 million. The average days of inventory in the industry is 65 days. What would ALT's average inventory need to be so that it would meet the industry average?

Question

Quizplus · Accepted Answer

To find the average inventory needed to meet the industry average days of inventory, we first calculate ALT's inventory turnover ratio: Inventory Turnover = Cost of Goods Sold / Average Inventory = $15 million / $3 million = 5 times. Then, calculate ALT's current days of inventory: Days of Inventory = 365 / Inventory Turnover = 365 / 5 = 73 days. To meet the industry average of 65 days, we need a new inventory turnover: New Inventory Turnover = 365 / 65 = 5.615. Finally, calculate the required average inventory: Required Average Inventory = Cost of Goods Sold / New Inventory Turnover = $15 million / 5.615 ≈ $2.67 million.

ALT Had $25 Million in Sales Last Year