Module 5 Homework Continued e complete sentences. Show and label all work to rec

Question

Module 5 Homework Continued e complete sentences. Show and label all work to receive any credit for the homework. Bess Eaton, owner of "The Donut Whole" has an Inventory Turnover ratio of 189 to 1. Bess wants to know how to improve her turnover ratio. As a donut industry accounting expert, you explain the effect of the following transactions or events on the average selling period to Bess Eaton: a. The length of the average selling period for The Donut Whole is? b. Purchase of donut dough. c. Borrowing from the bank of $2,400. d. Inventory on hand. e. Expanding the donut line to add 5 new kinds of donut. f Quantity discounts.

Explanation / Answer

Inventory turnover ratio = Cost of goods / Average inventory

where average inventory = (Opening inventory + Closing inventory) / 2

(a) Average selling period = No. of days in a year / Invetory turnover ratio = 365 / 189 = 1.93 days

(b) Purchase of donut dough - Purchase will increase the inventory and reduce the Inventory turnover ratio. This will increase the average selling period and help in increasing sales with more inventory.

(c) Borrowing from bank of $2,400 - If the money borrowed is used to purchase more stock, it will reduce the Inventory turnover ratio and hence increase the average selling period.

(d) Inventory on hand - If there is a decrease in inventory on hand, it will reduce the denominator value (average stock) and increase the numerator (cost of goods sold) as more is sold during the year. This is will increase the Inventory turnover and decrease the average selling period. An increase in inventory on hand will, in turn, increase the average selling period.

(e) Expanding the donut line to add 5 new kinds of donut - Expansion will mean that more inventory will need to be kept and there will be an increase in the cost of goods sold. If the new kinds of donuts get positive feedback (more sales) in the market, it will increase the cost of goods sold and inventory as well. It might lead to an increase in the average selling period if the product is likeable by the customers. Vice versa is also true.

(f) Quantity discounts - Quantity discount means that the company is giving more discount if the more units are purchased on the current selling price to increase sales. This will reduce the revenue per unit sale. The increase in sales will reduce the inventory and hence will increase the inventory turnover ratio. It means that the average selling period will decrease.

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