Question

Financial Results for Birmingham Wire and Cable Supply Company Year end 12/31/15 Income Statement Partial Balance Sheet Net Sales $10,000,000 Cash $109,375 Cost of Goods Sold $7,250,000 Accounts Receivable $1,232,877 Gross Margin $2,750,000 Beginning Inventory (1/1/2015) $1,542,553 Payroll/Fringes $2,000,000 Ending Inventory (12/31/2015) $1,735,455 All other Expenses $730.000 Other Current Assets $15,625 Total Expenses $2,730,000 Profit Before Taxes $20,000 As the VP of Operations for Birmingham Wire and Cable Supply, one of your responsibilities is to effectively manage your wire and cable inventory. Given that a key component of your inventory is copper wire, you are very sensitive to the market price of copper since that will affect your cost of wire and cable. Lately, you have been reading where copper prices are likely to go significantly higher over the next year. Given this information and the financial results above, you need to report to the CEO your plan for your inventory purchases next year. In doing so, answer the following questions: 1. What is your current inventory turnover ratio? (Show your calculations) 2. Given the impending rise of inventory costs in wire next year, would you plan to increase or decrease your purchases of wire and cable over the next few months? Explain in detail the reasoning behind your decision (the CEO would need your explanation to provide to the company’s Board of Directors).

Answer 1

1. Calculation of Inventory Turnover Ratio

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

When Average inventory= Opening Inventory+ Ending Inventory / 2 = (1,542,553 + $1,735,455)/2 = $1,639,004.

Inventory Turnover ratio = $7,250,000 / $1,639,004

Inventory Turnover ratio = 4.42 times

2 If the price of wire is increasing, its good opportunity for the company to take advantage with proper planning. The company has to increase the purchase of the stock to take this advantage however it should also be noted about the opportunity cost as more money now will be invested in the stock. If the increase in Price is minimal then there is no need to increase the purchase of the stock .