Solved Problem 11.1
Jack's Pottery Outlet has:
Total end-of-year assets = $5 million
First-of-the-year inventory = $375,000
Year-end inventory = $325,000
Annual cost of goods sold = $7 million
To evaluate supply chain performance:
Average inventory = (First-of-the-year inventory+ year-
end inventory)/2 = ($375,000+$325,000)/2 = $350,000
1. Percentage invested in inventory = (Total inventory
investment/Total assets) x 100
x 100 = 7%
= (350,000/5,000,000)
Jack's Pottery has 7% of its assets invested in inventory.
2. Inventory turnover = Cost of goods sold/Inventory investment
= 7,000,000/350,000 = 20
Inventory turnover is 20.
3. Weeks of supply= Inventory investment/(Annual cost of
goods sold/52 weeks)
= 350,000/(7,000,000/52) = 2.6
Weeks of supply is 2.6.
Example 2
Problem 11.11
Baker Mfg Inc. (see table 11.8) wishes to compare its inventory
to those of industry leaders, who have turnover of about 13
times per year and 8% of their assets invested in inventory.
Baker Mfg Inc.
Net revenue $27,500
Cost of sales $21,500
Inventory $ 1,250
Total assets $16,600
a. Inventory turnover = Cost of goods sold/Inventory
investment
= 21500/1250 = 17.2
Inventory turnover is 17.2.
b. Percentage invested in inventory = (Total inventory
investment/ Total assets) x 100
= 7.53%
= (1250/16600) x 100
Baker has 7.53% of its assets invested in inventory.
Baker is doing better than the industry. It has a turnover of 17.2
versus 13 for the industry and only 7.5% of its assets invested
in inventory versus 8% for the industry.
