Question

Inventory Turnover and days’ sales in inventory

Kracker Corp., Foodstuff, Inc., and Winston Stores, Inc. are three grocery chains in the United States. Inventory management is an important aspect of the grocery retail business. Recent balance sheets for these three companies indicated the following merchandise inventory (in millions) information:

	Kracker Corp.	Foodstuff Inc.	Winston Stores
Cost of merchandise sold	$33,580.0	$34,675.0	$35,040.0
Inventory, beginning of year	1,951.3	2,131.8	1,582.1
Inventory, end of year	1,912.7	2,048.2	1,489.9

a. & b. Determine the inventory turnover and the number of days’ sales in inventory (use 365 days and round to the nearest day) for the three companies. Round all interim calculations to one decimal place. For days' sales in inventory, round final answers to the nearest day, and for inventory turnover, round to one decimal place.

Company names	Inventory Turnover	Days' Sales in Inventory
Kracker	17.4	21
Foodstuff	16.6	22
Winston Stores	22.8	16

c. The inventory turnover ratios and days’ sales in inventory are similar  for Kracker and Foodstuff. Winston Stores has a higher  inventory turnover and a lower  days’ sales in inventory than Kracker and Foodstuff. These results suggest that Kracker and Foodstuff are less  efficient than Winston Stores in managing inventory.

d. If Kracker had Winston Stores’ days’ sales in inventory, how much additional cash flow would have been generated from the smaller inventory relative to its actual average inventory position? Round interim calculations to one decimal place and your final answer to the nearest million.
$_________ million

Answer 1

Inventory turn over ratio = Cost of goods sold / Average inventory

Average inventory = [ Beginning  inventory + Ending  inventory ] /2

Kracker Corp :

Average Inventory = [ $ 1,951.3 + $ 1,912.7] / 2 = $ 1,932

Inventory turn over ratio = $ 33,580 / $ 1,932 = 17.4 times

Days sales in inventory = 365 days / 17.4 = 21 days

Foodstuff Inc :

Average inventory = [ $ 2,131.8 + $ 2,048.2] / 2 = $ 2,090

Inventory turn over ratio = $ 34,675 / $ 2,090 = 16.6 times

Days sales in inventory = 365 days / 16.6 = 22 days.

Winston Stores :

Average inventory = [ $ 1,582.1 + $ 1,489.9 ] / 2 = $ 1,536

Inventory turn over ratio = $ 35,040 / $ 1,536 = 22.8 times

Days sales in inventory = 365 days / 22.8 = 16 days

Summary

	Kracker	Foodstuff	Winston
Inventory turn over ratio (times)	17.4	16.6	22.8
Days sales in inventory (Days)	21	22	16

C) Yes exactly. The Winston stores manages it's inventory more efficiently. Which reduces their blockages of working capital in inventory . Ultimately it reduces their working capital requirement for their operational activities.

D) If Kracker Corp had Winston's days sales in inventory then inventory turn over ratio for Kracker would be 22.8 days [ Same as Winston Stores ]

So, 22.8 times = $ 33,580 / Average inventory

Average inventory = $ 33,580 / 22.8 = $ 1,472.8

Additional cash flow generated from relatively smaller inventory = Actual average inventory - Relatively smaller average inventory

Additional cash flow generated = $ 1,932 - $ 1,472.8 = $ 459.2 or $ 459 (million)