Question

Simple​ Simon's Bakery purchases supplies on terms of 1.0/10 net 25. If Simple​ Simon's chooses to take the discount​ offered, it must obtain a bank loan to meet its​ short-term financing needs. A local bank has quoted Simple​ Simon's owner an interest rate of 12.0%on borrowed funds. Should Simple​ Simon's enter the loan agreement with the bank and begin taking the​ discount? ​ (Use 365 days for a​ year.)

Ohio Valley Homecare​ Suppliers, Incorporated​ (OVHS) had $20 million in sales in 2015. Its cost of goods sold was $8.0

million, and its average inventory balance was $1.7 million.

a. Calculate the number of inventory days outstanding for OVHS.

b. The average number of inventory days in the industry is 73 days. By how much would OVHS reduce its investment in inventory if it could improve its inventory days to meet the industry​ average?

Answer 1

a) The number of inventory days outstanding for OVHS is calculated below:

The number of inventory days outstanding = Average Inventory/Cost of Goods Sold*365

  = $1700,000/$8000,000*365

= 78 days

The number of inventory days outstanding for OVHS is 78 days

b) If the average number of inventory days in the industry is 73 days.So OVHS reduce its investment in inventory to improve its inventory days to meet the industry​ average is calculated below:

The number of inventory days outstanding = Average Inventory/Cost of Goods Sold*365

73 days = Average Inventory/$8000,000*365

   73*$8000,000/365 = Average Inventory

Average Inventory = $1600,000

OVHS reduce its investment in inventory to improve its inventory days to meet the industry​ average =

$1700,000 - $1600,000 = $100,000

OVHS reduce its investment in inventory to improve its inventory days to meet the industry​ average is $100,000 or $0.1 million.