Question

EXAMPLE: 1

You are the Nutrition and Food Services Director and your Chief Financial Officer (CFO) has requested that you evaluate the inventory within the department. Specifically, the CFO wishes to know if the facility is effectively managing the inventory.  

To accomplish this task, you will evaluate the inventory turnover from the previous period. You have determined the following information:

Inventory value at the beginning of the period                      $47,000

Purchases made during the period:                                         $225,000

Inventory at the end of the period:                                         $67,999

Your Procurement Specialist has determined the value of inventory for each month of the period. Those figures are as follows:

                                                            Month #1 = $42,000               Month #4 = $48,353

                                                            Month #2 = $44,996               Month #5 = $45,921

Month #3 = $49,214               Month #6 = $46,555

To assist you in completing this question, you will need the following calculations:

A).

Inventory at beginning of period        $XXX

+ Purchases during the period            +XXX

Total value of available food              $XXX

-Inventory at end of period                 -XXX

Cost of goods sold during period       $XXX

B). Inventory turnover = Cost of goods sold/Average inventory value

What is your inventory turnover ratio?

What does a high inventory ratio indicate?

What does a low inventory ratio indicate?

How do you interpret your inventory ratio to your CFO?

EXAMPLE: 2

You are the Nutrition and Food Services Director and your Chief Financial Officer (CFO) has requested that you evaluate the inventory within the department. Specifically, the CFO wishes to know if the facility is effectively managing the inventory.  

To accomplish this task, you will evaluate the inventory turnover from the previous quarter. You have determined the following information:

Inventory value at the beginning of the quarter:                    $52,000

Purchases made during the quarter:                                       $193,000

Inventory at the end of the period:                                         $69,999

Your Procurement Specialist has determined the value of inventory for each month of the quarter. Those figures are as follows:

                                                            Month #1 = $56,001

                                                            Month #2 = $57,996

                                                            Month #3 = $58,214

To assist you in completing this question, you will need the following calculations:

A).

Inventory at beginning of period        $XXX

+ Purchases during the period            +XXX

Total value of available food              $XXX

-Inventory at end of period                 -XXX

Cost of goods sold during period       $XXX

B). Inventory turnover = Cost of goods sold/Average inventory value

What is your inventory turnover ratio?

What does a high inventory ratio indicate?

What does a low inventory ratio indicate?

How do you interpret your inventory ratio to your CFO?

BREAKEVEN POINT: Point at which profit is not being made and losses are not being incurred.

• Fixed costs: do not vary with changes in volume of sales.
• Variable costs: do vary directly with changes in sales.
• Semi-variable costs: include elements of both fixed and variable costs. Before completing a breakeven point, you need to divide the semi-variable costs into their fixed and variable components before you can complete the breakeven point analysis.

EXAMPLE #3

Your CFO has asked you to conduct a break-even analysis of your hospital cafeteria for the upcoming fiscal year.

To assist you in completing this question, you will need the following calculation:

Your costs for the upcoming fiscal year:

Insurance:                               $1,500.00 (fixed cost)

Salaries:                                  $594,259.00 (semi-variable cost—80% is variable)

Utilities:                                  $20,000.00 (semi-variable cost—60% is fixed.)

Food license:                           $2,300.00 (fixed cost)

Supplies:                                 $453,816.00 (variable cost)

Projected Sales:                      $1,253,743.00

What is the break-even point, in sales, for this cafeteria for the upcoming fiscal year?

Other important operating ratios to the Food Service Director:

• Occupancy percentage = # of beds/rooms occupied/# of beds/rooms available

• Average customer check = total sales/# of customer checks

• Food cost percentage = cost of food/sales

(goal is 30% or less)

• Meals per labor hour = total # of meals served/total labor hours to produce meals

(example on page 385 of textbook notes index of 3.5 for acute care facilities)

• Meals per FTEs = total # of meals served/total FTE to produce meals

• Labor minutes per meal = total labor minutes to produce the meals/total number of meals served

• Labor hours per meal = total labor hours to produce the meals/total number of meals served

Answer 1

1-
Inventory at beginning period		47000
purchases		225000
total value of available foods		272000
less inventory at the end of period		67999
cost of goods sold		204001
average Inventory	(42000+44996+49214+48353+45921+46555)/6	46173.17
Inventory turnover ratio	cost of goods sold/average inventory	2040001/46173.17	44.18
Inventory turnover ratio		44.18
A high inventory ratio indicates that inventory is efficienty utilized and it helps in generating more sales and less value of inventory is kept in stores.
A low inventory ratio indicates that inventory is inefficienty utilized and it does not help in generating more sales and more value of inventory is kept in stores.
Inventory turnover ratio of the company is 44.18 which means sales Is 44.18 times greater than the average value of inventory over the period. As such there is no ideal ratio to compare the inventory turnover ratio and past year performance measure and industry average are not given to compare so we can say that ratio is sufficient good.