Question

A manufacturing company has annual sales of $180,000 and inventory of $40,000. The inventory turnover ratio for the company is 6

Answer 1

The inventory turnover ratio for the manufacturing company is calculated by dividing the annual sales by the average inventory. With annual sales of $180,000 and a turnover ratio of 6, the average inventory can be determined as $30,000.

Step-by-step explanation:

The inventory turnover ratio is a crucial financial metric that assesses how efficiently a company manages its inventory. It is calculated by dividing the annual sales by the average inventory. The formula for the inventory turnover ratio is:

`\[ \text{Inventory Turnover Ratio} = \frac{\text{Annual Sales}}{\text{Average Inventory}} \]`

Given that the annual sales are $180,000 and the turnover ratio is 6, we can rearrange the formula to find the average inventory:

`\[ \text{Average Inventory} = \frac{\text{Annual Sales}}{\text{Inventory Turnover Ratio}} \]`

Substituting the values:

`\[ \text{Average Inventory} = (\$180,000)/(6) = \$30,000 \]`

Therefore, the average inventory for the company is $30,000. This means that, on average, the company's inventory is sold and replaced six times during the year. A high inventory turnover ratio generally indicates effective inventory management, ensuring that products are sold promptly and reducing holding costs.