Malia Inc. has $110 million in sales. The company expects that its sales will in

Question

Malia Inc. has $110 million in sales. The company expects that its sales will increase by 5% this year. Malia Inc.’s CFO uses a simple linear regression to forecast the company’s inventory level for a given level of projected sales. On the basis of recent history, the estimated relationship between inventories and sales (in millions) is as follows: Inventories = $9 + 0.0875 (Sales) Given the estimated sales forecast and the estimated relationship between inventories and sales, what are your forecasts of the company’s year-end inventory level and its inventory turnover ratio?

Explanation / Answer

Present sales = $110 million

Expected sales = $110 million * 1.05 = $115.50 million

Inventories = $9 + (0.0875*Sales)

Forecasted year-end inventory = $9 million + (0.0875 * $115.50 million) = $19.11 million

Inventory turnover ratio = Sales/Inventory = $115.50 million/$19.11 million = 6.04 times

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