Dell, Inc. is the leading manufacturer of personal computers. In a recent year,
ID: 2664609 • Letter: D
Question
Dell, Inc. is the leading manufacturer of personal computers. In a recent year, it reopened the following in dollars and millions.
Net sales revenue $61,101
Cost of sales $50,144
Beginning Inventory $1,180
Ending Inventory $867
Required:
1. Determine the inventory turnover and average days to sell inventory for the current year.
2. Explain the meaning of each number.
Net sales revenue $61,101
Cost of sales $50,144
Beginning Inventory $1,180
Ending Inventory $867
Explanation / Answer
1) The formula for calculating the inventory turnover ratio is Inventory turnover ratio = Cost of goods sold / Average inventory Where Average inventory = (Beginning inventory + Ending inventory) / 2 = ($1,180 + $867) /2 = $1,023.5 Substituting the values in the above formula, we get Inventory turnover ratio = $50,144 / $1,023.5 = 49 times The formula for calculating Day's sales in inventory is Day's sales in inventory = 365 days / Inventory turnover ratio = 365 / 49 = 7.45 days 2) A high inventory turnover ratio is generally desirable. Some times it may lead to estimations like either strong sales or ineffective buying. Higher inventory turnover ratios are unhealthy because they represent an investment with a zero rate of return. Here the ratio is too high which may lead the company to trouble. Generally , the lower the days sales in inventory, the better it is, but it is important to note that the average DSI varies from one industry to another. This measures the number of days it took to sell the aveage inventory held during the one-year specific period.Related Questions
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