Question

your company is planing to cut inventory levels to reduce working capital to $250000 for next year.you are developing a sensitivity analysis for next year's budget and have arrived at the following scenarios

Year 1 2 3 4 5 6

Cash 125'000 349,000 421,000 300,000 250,000 725,000

Accounts Receivable 245,000 211,000 153,000 200,000 146,000 600,000

Inventory 310,000 222,000 245,000 130,000 300,000 300,000

Account Payable 350,000 320,000 343,000 289,000 280,000 1,200,000

Required

a. Calculate the inventory reduction required to reduce working capital to $250,000 for each scenario.

b. For which scenarios does it not seem feasible to cut inventory by the amounts suggested in part (a)?  

Answer 1

Answer a
Calculate the inventory reduction required to reduce working capital to $250,000 for each scenario.
Year	1	2	3	4	5	6
Current Assets
- Cash	$125,000.00	$349,000.00	$421,000.00	$300,000.00	$250,000.00	$725,000.00
- Accounts Receivables	$245,000.00	$211,000.00	$153,000.00	$200,000.00	$146,000.00	$600,000.00
- Inventory	$310,000.00	$222,000.00	$245,000.00	$130,000.00	$300,000.00	$300,000.00
Total Current Assets	$680,000.00	$782,000.00	$819,000.00	$630,000.00	$696,000.00	$1,625,000.00
Less : Current Liabilities
- Accounts Payable	$350,000.00	$320,000.00	$343,000.00	$289,000.00	$280,000.00	$1,200,000.00
Working Capital	$330,000.00	$462,000.00	$476,000.00	$341,000.00	$416,000.00	$425,000.00
Less : Required Working Capital	$250,000.00	$250,000.00	$250,000.00	$250,000.00	$250,000.00	$250,000.00
Inventory reduction required	$80,000.00	$212,000.00	$226,000.00	$91,000.00	$166,000.00	$175,000.00
Answer b
I do not find such scenarios where it not seem feasible to cut inventory by the amounts suggested in Part a.