Question

QT, Inc. and Elppa Computers, Inc. compete with each other in the personal computer market. QT assembles computers to customer orders, building and delivering a computer within four days of a customer entering an order online. Elppa, on the other hand, builds computers for inventory prior to receiving an order. These computers are sold from inventory once an order is received. Selected financial information for both companies from recent financial statements follows (in millions):

QT Elppa
Sales $56,940 $120,357
Cost of goods sold 44,754 92,385
Inventory, beginning of period 1,382 6,317
Inventory, end of period 1,404 7,490
a. Determine for both companies (1) the inventory turnover and (2) the number of days' sales in inventory. Round your calculations and answers to one decimal place. Assume 365 days a year.
QT Elppa
1. Inventory turnover
2. Number of days' sales in inventory days days
b. QT has a much higher inventory turnover ratio than does Elppa. Likewise, QT has a much smaller number of days' sales in inventory. These significant differences are a result of QT's make-to-order strategy.

Answer 1

Answer and Explanation:

The computation of the inventory turnover, number of days sales in inventory is shown below:

1. For inventory turnover

As we know that

Inventory turnover is

= Cost of goods sold ÷ average inventory

where,

Average inventory is = (Opening inventory + ending inventory) ÷ 2

For QT, it is

= ($44,754 ÷ (1,382 + 1,404) ÷ 2)

= 32.1 times

For Elppa

= ($92,385 ÷ ( 6,317+ 7,490) ÷ 2)

= 13.4 times

2. Now the days sales inventory is

As we know that

Days sales in inventory is

= 365 ÷ Inventory turnover ratio

For QT ,it is

= 365 ÷ 32.1 times

= 11.4 days

And, for Elppa,

= 365 ÷ 13.4 times

= 27.3 days

b. As it can be seen that For QT, the inventory turnover is higher that means for Elppa it would be lesser as it assembles before order received but for Elppa the days outstanding is high that means the days outstanding is lesser in the case fo QT as it assembles after order received