Question

Happy Valley Homecare​ Suppliers, Incorporated​ (HVHS), had $ 10.6 million in sales in 2010. Its cost of goods sold was $ 4.24 ​million, and its average inventory balance was $ 1.81 million.

a. Calculate the average number of days inventory outstanding ratios for HVHS.

b. The average number of inventory days in the industry is 73 days. By how much must HVHS reduce its investment in inventory to improve its inventory days to meet the​ industry? ​(Hint: Use a​ 365-day year.)

Answer 1

a.

Compute the average number of days in inventory, using the equation as shown below:

Days in inventory = 365*Average inventory/ Cost of goods sold

                              = 365*$1,810,000/ $4,240,000

                              = 155.81 days

Hence, the days sales in inventory is 155.81 days.

b.

Compute the average inventory as per standards, using the equation as shown below:

Days in inventory = 365 days*Average inventory/ Cost of goods sold

                73 days = 365 days* Average inventory / $4,240,000

Rearrange the above-mentioned equation to determine the average inventory (Standards) as follows:

Average inventory = 73 days*$4,240,000/ 365 days

                               = $848,000

Hence, the average inventory as per standards is $848,000.

Compute the reduction in inventory investment, using the equation as shown below:

Reduction = Actual inventory – Inventory as per standards

               = $1,810,000 - $848,000

                 = $962,000

Hence, the reduction in inventory investment is $962,000.