Final answer:
To compute the inventory turnover for Year 3 and Year 2, divide the cost of goods sold by the average inventory. The inventory turnover for Year 3 is 5.27 times, and for Year 2, it is 3.38 times. Palmer Company improved its inventory turnover from Year 2 to Year 3, but its days' sales in inventory decreased.
Step-by-step explanation:
To compute the inventory turnover for Year 3 and Year 2, we need to divide the cost of goods sold by the average inventory. The average inventory can be calculated by adding the beginning and ending inventory and dividing it by 2. For Year 3, the cost of goods sold is $548,825 and the average inventory is $103,925 [(101,000 + 105,900) / 2]. So, the inventory turnover for Year 3 is 5.27 times. Similarly, for Year 2, the cost of goods sold is $331,650 and the average inventory is $98,125 [(96,250 + 101,000) / 2]. Thus, the inventory turnover for Year 2 is 3.38 times.
The days' sales in inventory can be calculated by dividing 365 (number of days in a year) by the inventory turnover. For Year 3, the days' sales in inventory is approximately 69.27 days (365 / 5.27), and for Year 2, it is approximately 108.28 days (365 / 3.38).
Comparing Year 2 and Year 3, Palmer Company improved its inventory turnover, as it increased from 3.38 to 5.27. This indicates that the company is selling its inventory more quickly, which is generally considered an improvement. However, it also increased its days' sales in inventory from 108.28 to 69.27, which means it took longer to sell its inventory in Year 3 compared to Year 2. This decrease in the number of days may indicate a more efficient use of inventory.