Question

Buzzrite, a retailer of casual clothes, ended the current year with annual sales (at cost) of $48 million. During the year, the inventory of apparel turned over six times. For the next year, Buzzrite plans to increase annual sales (at cost) by 25 percent.

a. What is the increase in the average aggregate inventory
value required if Buzzrite maintains the same inventory
turnover during the next year?
b. What change in inventory turns must Buzzrite achieve
if, through better supply chain management, it wants
to support next year’s sales with no increase in the
average aggregate inventory value?

Answer 1

a. Increase in average aggregate inventory value is $2 million. b. Change in inventory turns required is 25%.

Step-by-step explanation:

a. To calculate the increase in the average aggregate inventory value, we need to first calculate the current average inventory value. Dividing the annual sales by the inventory turnover, we find that the current average inventory value is $8 million ($48 million / 6).

Next, we can calculate the increase by multiplying the current average inventory value by the planned increase in annual sales (25%). So, the increase in the average aggregate inventory value is $2 million ($8 million * 0.25).

b. To find the change in inventory turns required to support next year's sales with no increase in average aggregate inventory value, we divide the planned increase in annual sales by the current average inventory value ($2 million / $8 million). This gives us a change of 0.25, or 25%. Buzzrite would need to increase its inventory turnover by 25% to achieve this.