Quantitative Reasoning Problem 3 ACC 121 Assignment is to be completed as a Word Document, PDF,...

Quantitative Reasoning Problem 3

ACC 121

Assignment is to be completed as a Word Document, PDF, or on notebook paper and submitted through Moodle

Assume a company maintains an inventory level of $30,000, meaning the average balance in the inventory records is $30,000. Also assume it’s annual cost of good sold (COGS) is $120,000.

The management is proposing to reduce inventory levels to $15,000 with no impact on cost of goods sold. To do so they propose working with suppliers to get quicker deliveries and to make smaller, more frequent orders.

Required:

Compute the company’s inventory turnover and its days sales in inventory under both current conditions and proposed conditions.

Evaluate and comment on the merits of their proposal given your analysis for part 1. Identify any concerns you might have about the proposal.

Expert Solution

ANSWER) INVENTORY TURNOVER = COST OF GOODS SOLD / AVERAGE INVENTORY

DAYS SALES UNDER INVENTORY= NO.OF DAYS / INVENTORY TURNOVER

PARTICULARS INVENTORY TURNOVER DAY SALES INVENTORY

PRESENT CONDITION 120000/30000=4 365/4=91.25 DAYS

PROPOSED CONDITION 120000/15000=8 365/8=45.625 DAYS

COMMENTS: IN PRESENT CASE CASH CONVERSION CYCLE HAVING 3 COMPONENTS THEY ARE FIRST CASH INTO INVENTORY SECOND INVENTORY INTO SALES THIRD ONE SALES INTO RECIVED CASH . THE THREE PERIODS ARE IMPORTENT BECAUSE ANY BUSINESS WE REQUIRE SUFFICINT CASH TO MOBILISE FUNDS AND REPAY DEBTS INTIME REPAY DIVIDENDS INTIME ETC. FOR THIS PURPOSE THE PRESENT CONDITION HAVING 91.25 INVENTORY DAY SALES THE PROPSED CONDITION HAVING 45.625 DAYS SALES PRESENT CONDITION HAVING 45.625 MORE CASH CYCLE TIME THAN PROPSED CONDITION. SO THAT COMPANY CAN USE PROPSED CONDITION FOR REDUCTION IN CASH CYCLE TME. THE PROPSED CONDITION IS BETTER THEN THE PRESENT CONDITION.

ekkarill92 answered 1 year ago

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