Question

Urbanite Hip is a clothing store catering to college students
and young professionals. It carries fashion merchandise and
wants to ensure that it is using inventory effectively. Cost of
goods sold is $5,000,000, and average inventory in dollars is
$250,000.
a. What is their inventory turnover?
b. What is the weeks of supply, assuming 52 weeks per year?
c. Urbanite Hip is expecting to increase sales by 10% next year
while maintaining the same level of average inventory. How
will their inventory turnover and weeks of supply change?

Answer 1

Question: Urbanite Hip is a clothing store catering to college students and young professionals. It carries fashion merchandise and wants to ensure that it is using inventory effectively. Cost of goods sold is $5,000,000, and average inventory in dollars is $250,000.

Answer:

Given that:

Cost of goods sold = 5000000

Average inventory = 250000

a. What is their inventory turnover?

Inventory Turnover is given by:

Inventory Turnover = Cost of goods sold / Average inventory

Therefore:

Inventory Turnover = 5000000 / 250000

Inventory Turnover = 20

b. What is the weeks of supply, assuming 52 weeks per year?

Given that:

Number of weeks per year = 52

Now:

Weeks of supply is given by:

Weeks of supply = (Average Inventory x Number of weeks per year) / Cost of goods

Therefore:

Weeks of supply = (250000 x 52) / 5000000

Weeks of supply = 2.6

c. Urbanite Hip is expecting to increase sales by 10% next year while maintaining the same level of average inventory. How will their inventory turnover and weeks of supply change?

Given that:

Next year 10% increase in sales, therefore:

Cost of goods sold = 5000000 + 10% = 5500000

Therefore:

Inventory Turnover = 5500000 / 250000

Inventory Turnover = 22

Weeks of supply = (250000 x 52) / 5500000

Weeks of supply = 2.36

Conclusion: Their Inventory turnover will certainly go up and Weeks of supply will go down, which will eventually lead to stockout.