Question

The industry where you work has a turnover rate of 9. The company you work for is forecasting sales of $85,000 next year. If the annual cost of goods sold is 55% of sales, what is the cost for inventory and how many months' supply should be kept on hand?

Answer 1

The company should keep approximately 1.33 months' supply of inventory on hand to meet its forecasted sales for the next year. To determine the cost of inventory, we would need to know the cost per unit of the inventory.

Step-by-step explanation:

To determine the cost for inventory and how many months' supply should be kept on hand, we can follow these steps:

---Calculate the cost of goods sold:

Cost of goods sold = 55% x $85,000 = $46,750

---Calculate the desired inventory turnover rate:

Turnover rate = 9

---Calculate the average inventory:

Average inventory = Cost of goods sold / Turnover rate = $46,750 / 9 = $5,194.44

---Calculate the cost of inventory:

Cost of inventory = Average inventory x Cost per unit

We don't know the cost per unit, so we can't calculate the cost of inventory yet. However, we can calculate the number of months' supply that should be kept on hand using the following formula:

Number of months' supply = (Average inventory / Cost of goods sold) x 12

Plugging in the numbers we know, we get:

Number of months' supply = ($5,194.44 / $46,750) x 12 = 1.33 months

Therefore, the company should keep approximately 1.33 months' supply of inventory on hand to meet its forecasted sales for the next year. To determine the cost of inventory, we would need to know the cost per unit of the inventory.