Andrew Manufacturing held an average inventory of $1.1 million (raw materials, work-in-process, finished goods) last year. Its sales were $8

Andrew Manufacturing held an average inventory of $1.1 million (raw materials, work-in-process, finished goods) last year. Its sales were $8.0 million, and its cost of goods sold was $5.8 million. The firm operates 260 days a year. What is the inventory day’s supply? What target inventory level is necessary to reach a 20- and 10-day inventory days supply during the next two years?

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  1. Answer:

    The Inventory day’s supply is 49.3 days supply

    The Target inventory level to reach a 20-day inventory days supply is $ 0.446 million

    The Target inventory level to reach a 10-day inventory days supply is $ 0.223 million

    Explanation:

    In order to calculate the inventory day’s supply we would have to calculate the following:

    Inventory day’s supply = (Average inventory / Cost of goods sold) * 260 days a year

    Inventory day’s supply = 1.1/5.8)*260

    Inventory day’s supply = 49.3 days supply

    To calculate the target inventory level necessary to reach a 20- and 10-day inventory days supply during the next two years we would have to calculate the following:

    Target inventory level to reach a 20-day inventory days supply = (20/260)*5.8 = $ 0.446 million

    Target inventory level to reach a 10-day inventory days supply = (10/260)*5.8 = $ 0.223 million

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