Question

An analyst is modeling the financial statements of a company that has recently made annual sales of $3 billion with a gross profit margin of 65%. Sales are expected to grow by 10% next year and gross margins are not expected to change. The company is improving its inventory management systems to lower its days of inventory on hand from 30 days to 20 days for the coming period. The estimated inventory projected for next year's balance sheet will be closest to:

a) $53 million.
b) $63 million.
c) $73 million.
d) $83 million.

Answer 1

To calculate the projected inventory for next year's balance sheet, we need to know the COGS. The COGS can be calculated by multiplying the sales by the gross profit margin. Currently, the company has inventory worth 30 days of COGS, but with the improvement, it will decrease to 20 days.

Step-by-step explanation:

To calculate the projected inventory for next year's balance sheet, we need to know the cost of goods sold (COGS). COGS can be calculated by multiplying the sales by the gross profit margin (1 - 0.65 = 0.35). So, COGS = $3 billion * 0.35 = $1.05 billion. The days of inventory on hand can be calculated by dividing the average inventory by the COGS per day. Currently, the company has inventory worth 30 days of COGS, so the average inventory is $1.05 billion / 30 = $35 million. With the improvement in inventory management, the days of inventory will decrease to 20 days, so the projected inventory for next year will be $35 million * 20 = $700 million.