Baryla Inc. manufactures high quality decorator lamps in a plant located in east

Question

Baryla Inc. manufactures high quality decorator lamps in a plant located in eastern Tennessee. Last year the firm had sales of $93 million and a gross profit margin of 45 percent.

a. (5 points) How much inventory can Baryla hold and still maintain an inventory turnover ratio of at least 6.3 times? (Round to one decimal place.)

b. (5 points) Currently, some of Baryla's inventory includes $2.3 million of outdated and damaged goods that simply remain in inventory and are not salable. What inventory ratio must the good inventory maintain in order to achieve an overall turnover ratio of at least 6.3 (including the unsalable items)? (Round to one decimal place.)

Explanation / Answer

(a) Computation of the inventory hold by Baryla.We have,

Inventory turnover ratio = Cost of good sold / Average inventory

Where,

Invenotory turnover ratio = 6.3 times

Cost of good sold = Sales - profit margin

Cost of good sold = 93 - (93 x 45%) = 93 - 41.85 = $ 51.15 million

Average inventory = 51.15 / 6.3 = 8.12 million

Hence, the inventory can hold by Baryla is $ 8.12 million.

(b) Total outdated and damaged goods in inventory = $ 2.3 million

Total inventory in good condition = 8.1 - 2.3 = $ 5.8 million

The inventory ratio for the good inventory = 5.8/8.1 = 0.716*100 = 71.6%

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