Assume that ABC Co.has sales of $10 million and inventory of $2 million.The corporation utilizes the percentage-of-sales method of financial forecasting.If ABC is expected to generate sales of $14 million next year, what will the firm's investment in inventory be?

Question

Quizplus · Accepted Answer

The percentage-of-sales method assumes that inventory is a function of sales. Therefore, the formula to calculate the required investment in inventory is:
((Inventory / Sales) x 100) = % of sales invested in inventory
Then, we can use this formula to calculate the required investment in inventory for the next year:
((2,000,000 / 10,000,000) x 100) = 20%
20% of $14 million sales = $2.8 million investment in inventory. Therefore, the correct answer is option C.

Assume That ABC Co