Question

Sensitron and Douglas Tools manufacture and market power tools and accessories. Sensitron targets customers in the professional contractor market, while Douglas Tools focuses on home users and professionals. Both firms use the same cost flow assumption for valuing inventories and cost of goods sold. Selected financial data for the companies appears below. Sensitron 2010 2009 2008 Cost of Goods Sold $1,144,200 $1,134,100 $1,169,400 Average Inventory 372,550 397,050 436,870 Change in Sales from previous year 0.64% -3.68% 11.83% ​ ​ ​ ​ Douglas Tools 2010 2009 2008 Cost of Goods Sold $2,876,100 $2,846,600 $2,889,000 Average Inventory 730,550 778,100 797,500 Change in Sales from previous year 3.50% -5.12% 0.59% Required: 1. Calculate the inventory turnover ratio for each firm for year 2010, 2009, and 2008. 2. Suggest reasons for the differences in the Inventory turnover ratios for these two firms.

Answer 1

Answer 1 :
Inventory Turnover Ratio= Cost of Goods Sold/ Avg Inventory

Sensitron
Year	COGS	Avg Inventory	Inventory Turnover Ratio
2010	1,144,200	372,550	3.07
2009	1,134,100	397,050	2.86
2008	1,169,400	436,870	2.68

Douglas Tools
Year	COGS	Avg Inventory	Inventory Turnover Ratio
2010	2,876,100	730,550	3.94
2009	2,846,600	778,100	3.66
2008	2,889,000	797,500	3.62

Answer 2:
The main reason in the difference between the inventory turnover ratios of the two firms might be because of the fact that Sensetrion only focuses on the professional contractor market, while Douglas tools focus both on home users and the professionals.