Question

Executive Enterprises Inc. produces keyboard synthesizer workstations used in the production of movie sound effects. Until recently, they manufactured products in anticipation of sales orders based on historical data, which led to significant inventory stockpiling. Their average annual sales are $273 million, cost of goods sold is 66% of sales, and their inventory turnover ratio is currently 4.0.

If Executive Enterprises Inc. were to adopt a new inventory management system that allowed component parts to be delivered mere hours before they were required for assembly, the company would increase its inventory turnover ratio to 6.0. What would the reduction in inventory be if the company adopted this system?
a. $15.0 million
b. $9.0 million
c. $14.5 million
d. $10.0 million

Answer 1

a. $15.0 million

Step-by-step explanation:

COGS = 66%*Sales = 66% * $273 million = $180.18 million

Old inventory = COGS/Inventory Ratio = $180.18/4 = $45.045 million

New Inventory = COGS/Inventory Ratio = $180.18/6 = $30.03 million

Reduction in inventory = Old inventory - New inventory = $45.045 million - $30.03 million = $15.015 million = $15 million