Question

Inventory Analysis

QT, Inc. and Elppa Computers, Inc. compete with each other in the personal computer market. QT assembles computers to customer orders, building and delivering a computer within four days of a customer entering an order online. Elppa, on the other hand, builds computers for inventory prior to receiving an order. These computers are sold from inventory once an order is received. Selected financial information for both companies from recent financial statements follows (in millions):

	QT		Elppa
Sales	$48,180		$61,900
Cost of goods sold	40,150		58,400
Inventory, beginning of period	1,187		4,960
Inventory, end of period	1,387		5,760

a. Determine for both companies (1) the inventory turnover and (2) the number of days' sales in inventory. Round your calculations and answers to one decimal place. Assume 365 days a year.

	QT		Elppa
1. Inventory turnover
2. Number of days' sales in inventory		days		days

b. QT has a inventory turnover ratio than does Elppa Company. Likewise, QT has a number of days' sales in inventory

Answer 1

Answer a.

QT, Inc.:

Average Inventory = (Beginning Inventory + Ending Inventory) / 2
Average Inventory = ($1,187 + $1,387) / 2
Average Inventory = $1,287

Inventory Turnover = Cost of Goods Sold / Average Inventory
Inventory Turnover = $40,150 / $1,287
Inventory Turnover = 31.20 times

Number of Days’ Sales in Inventory = 365 / Inventory Turnover
Number of Days’ Sales in Inventory = 365 / 31.20
Number of Days’ Sales in Inventory = 11.70 days

Elppa Computers, Inc.:

Average Inventory = (Beginning Inventory + Ending Inventory) / 2
Average Inventory = ($4,960 + $5,760) / 2
Average Inventory = $5,360

Inventory Turnover = Cost of Goods Sold / Average Inventory
Inventory Turnover = $58,400 / $5,360
Inventory Turnover = 10.90 times

Number of Days’ Sales in Inventory = 365 / Inventory Turnover
Number of Days’ Sales in Inventory = 365 / 10.90
Number of Days’ Sales in Inventory = 33.49 days

Answer b.

QT has a higher inventory turnover ratio than does Elppa Company. Likewise, QT has a smaller number of days’ sales in inventory.