A firm is planning for next year and has developed the following information. $\begin{array}{ll}
\text { Thisyear's sales } & \$ 7.90 \mathrm{M} \
\text { Next year's sales } & \$ 9.48 \mathrm{M} \
\text { This year's inventory } & \$ 2.37 \mathrm{M}\\text { This ye a1's cost ratio* } & 60.0 \% & * \text { Cost of goods sold (COGS) } \
\text { Next year's cost ratio* } & 55.0 \% & \text { as a } \% \text { of sales }
\end{array}$ What inventory balance should be included in next year's plan if management intends to increase inventory turnover by one turn in the coming year? Calculate using ending balances and the COGS formulation of inventory turnover.

Question

Quizplus · Accepted Answer

Inventory turnover = COGS / Average inventoryNext year's COGS = Next year's sales * Next year's cost ratio = $9.48M * 55.0% = $5.214MAverage inventory = (This year's inventory + Next year's inventory) / 2Next year's inventory = Average inventory * Inventory turnoverNext year's inventory = (2.37M + Next year's inventory) / 2 * (1 + 1)Next year's inventory = 2.37M + Next year's inventoryNext year's inventory = 2.37M / 2 = $1.185M

A Firm Is Planning for Next Year and Has Developed