Question

McFadden's department store has been a profitable family-owned retail business (consisting of several stores in the Pacific Coast region) since its beginning in 1910. The last five years have been rough due to the economy, and McFadden's has been losing ground to national department and discount stores moving into the area.

The executive team is hopeful that a turnaround is finally occurring. Last year's sales volume for the entire retail store chain was $50 million. The National Retail Federation (NRF) predicts an increase in retail sales due to positive economic projections being felt throughout the country (e.g., unemployment has been dropping, the stock market is up, so investors have more money in their pockets, working hours have been steadily increasing, and there is an expectation of pent-up consumer demand after a number of years of lower sales and belt-tightening in households). Overall, retailers are expecting one of the best holiday seasons in a long time!

The NRF estimates a 5.5% increase in sales during the July to December 2019 season for the Pacific Coast, where McFadden's operates. Upper management believes that this increase in sales will be felt throughout all of its departments.

You are the buyer for Department 121, which sells young men's clothing. This department has been one of the more profitable departments for the company. Last year (2018), sales from Department 121 for the July-December season reached $750,000. Your sales forecast for this year (2019) must take into consideration the NRF's prediction for an increase in sales this period, and be based on an initial markup percentage of 52%.

Reductions for this period in 2018 totaled $105,000. Management expects the dollar amount of reductions to increase this season by 2% in an attempt to spur additional sales. The following reduction percentages are planned for November and December:

November: 21%

December: 35%

Relying on information from the last three years, you forecast that 28% of seasonal sales will occur in November and 38% in December:

November:28%

December: 38%

You have the following additional information on the historical stock-to-sales ratio for this type of department:

July: 3.0

August: 1.9

September: 2.1

October: 2.2

November: 3.0

December: 3.2

Today is November 11, 2019. Your inventory database has record of an additional merchandise order valued at $300,000 that has yet to be delivered. It's on a container ship arriving at one of the Pacific ports in five days. Also, the distribution center just notified you via the in-house inventory alert system that another large shipment has just arrived on the loading docks for Department 121. This shipment contains merchandise valued at $190,000 and has yet to be scanned into the computer system.

Finally, your reports show that your desired beginning-of-the-month stock (BOM) for December is $962,160.

1. Given the NRF's retail trend forecast for 2019, you need to project planned seasonal sales (July-December) for Department 121 for 2019.
2. Calculate Department 121's projected monthly sales for November.
3. Calculate Department 121's existing inventory or BOM inventory for November.
4. Calculate Department 121's desired ending inventory or EOM inventory for November.

Answer 1

Answer:

1. CALCULATION OF DEPARTMENT 121'S DESIRED EOM INVENTORY FOR NOVEMBER

Given: Department 121 Desired BOM Inventory for Dec.month is = $ 962 160.

Hence, Department 121 Desired EOM Inventory for Nov month is = $ 962 160 (Next month's Opening balance is Current month's Closing balance).

2. CALCULATION OF DEPARTMENT 121'S PROJECTED MONTHLY SALES FOR NOVEMBER

GIVEN: Historical stock-to-sales ratio for Nov. = 3

Stock to Sales Ratio = Monthly Stock / Monthly Sales = 962160/ Monthly Sales = 3.

Therefore, Projected Monthly Sales for November  = 962160/3 = $ 320 720.

3. CALCULATION OF DEPARTMENT 121'S EXISTING INVENTORY OR BOM INVENTORY FOR NOV.

BOM Inventory for Nov. = EOM Inventory + Sales - Purchases

= $ 962 160 + $ 320 720 - ($ 300 000 + $ 190 000)

= $ 1 282 880 - $ 490 000

= $ 1 772 880

4.CALCULATION OF DEPARTMENT 121'S PLANNED SEASONAL SALES (JULY - DEC.2019)

= 750 000 X 5% OF 750 000 = $ 791 250