A firm's management is planning to improve inventory turnover to 9.0 next year. Next year's revenues are expected to be $150M. The firm's cost ratio (COGS as a percent of sales) is 30%. What figure should be planned for next year's inventory balance? Calculate using ending balances and the COGS formulation of inventory turnover.

Question

Quizplus · Accepted Answer

Inventory turnover is calculated as COGS divided by average inventory. With a cost ratio of 30%, COGS is $45M (30% of $150M). To achieve an inventory turnover of 9.0, the inventory balance should be $5M ($45M / 9).

A Firm's Management Is Planning to Improve Inventory Turnover to 9.0