Question

Happy Valley Homecare​ Suppliers, Incorporated​ (HVHS), had $ 20.0 million in sales in 2010. Its cost of goods sold was $ 8.00 ​million, and its average inventory balance was $ 2.00 million.

a. Calculate the average number of days inventory outstanding ratios for HVHS.
b. The average number of inventory days in the industry is 73 days. By how much must HVHS reduce its investment in inventory to improve its inventory days to meet the​ industry?
​(Hint: Use a​ 365-day year.)

Answer 1

To calculate the average number of days inventory outstanding ratio, divide average inventory by cost of goods sold and multiply by 365. HVHS would need to reduce its investment in inventory by $0.10 million to meet the industry average.

Step-by-step explanation:

To calculate the average number of days inventory outstanding ratio, we can use the formula:

Average number of days inventory outstanding = (Average Inventory / Cost of Goods Sold) * 365

In this case, the average inventory balance is $2.00 million and the cost of goods sold is $8.00 million. Plugging these values into the formula, we get:

Average number of days inventory outstanding = (2.00 / 8.00) * 365 = 91.25 days

To meet the industry average of 73 days, HVHS would need to reduce its inventory days by 18.25 days. To calculate the reduction in investment needed, we can use the formula:

Reduction in investment = (Average Inventory / 365) * Reduction in days

Plugging in the values, we get:

Reduction in investment = (2.00 / 365) * 18.25 = $0.10 million

Therefore, HVHS would need to reduce its investment in inventory by $0.10 million to meet the industry average.