Question

The Dump is a high-end designer prototypes, closeouts, and overstocks, near Philadelphia, PA. Due to recent market pressures, the company is trying to reduce inventory in its supply chain. In 2022, cost of goods sold was $7.6 million and inventory was $1.5 million. This year, 2023, cost of goods sold is $8.6 million and inventory investment of $1.6 million. The value of total assets in 2022 were $50 million and currently it is $45 million. Use the information given to answer following question. a. Compute the weeks of supply in 2022 and in 2023. b. Compute the percentage of assets committed to inventory investment for 2022 and 2023. c. Compute the inventory turnovers for 2022 and 2023. d. Using the information in parts a, b, and c, is the Dump making progress in its inventory-reduction efforts? Discuss.

Answer 1

The weeks of supply, percentage of assets committed to inventory investment, and inventory turnover for The Dump were computed and analyzed. The company is not making significant progress in its inventory reduction efforts.

Step-by-step explanation:

a. To compute the weeks of supply in a year, divide the cost of goods sold by the average inventory. In 2022, the weekly cost of goods sold is $146,154 ($7,600,000 / 52) and the average inventory is $28,846 ($1,500,000 / 52). Therefore, the weeks of supply in 2022 is approximately 5 weeks. In 2023, the weekly cost of goods sold is $165,385 ($8,600,000 / 52) and the average inventory is $30,769 ($1,600,000 / 52). Therefore, the weeks of supply in 2023 is approximately 5.4 weeks.

b. To compute the percentage of assets committed to inventory investment, divide the inventory investment by the total assets and multiply by 100. In 2022, the percentage is 3% ($1,500,000 / $50,000,000 * 100). In 2023, the percentage is also 3% ($1,600,000 / $45,000,000 * 100).

c. To compute the inventory turnover, divide the cost of goods sold by the average inventory. In 2022, the inventory turnover is 263 ($7,600,000 / $28,846). In 2023, the inventory turnover is 280 ($8,600,000 / $30,769).

d. The Dump is not making significant progress in its inventory-reduction efforts. Although the weeks of supply increased slightly from 2022 to 2023, the percentage of assets committed to inventory investment and the inventory turnover remained relatively constant. This suggests that the company has not successfully reduced its inventory levels in proportion to its overall assets.