Cyberphone, a manufacturer of cell phone accessories, ended the current year wit

Question

Cyberphone, a manufacturer of cell phone accessories, ended the current year with annual sales (at cost) of $56 million. During the year, the inventory of accessories turned over seven times. For the next year, Cyberphone plans to increase annual sales (at cost) by 30 percent. a. What is the increase in the average aggregate inventory value required if Cyberphone maintains the same inventory turnover during the next year? Snter your response as an integer.) b. What change in inventory turns must Cyberphone achieve if, through better supply chain management, it wants to support next year's sales with no increase in the average aggregate inventory value?turns. (Enter your response rounded to one decimal place.)

Explanation / Answer

Inventory turnover will be determined as :

Inventory turnover = Annual sales ( at cost ) / Inventory value

Answer to question a :

Annual sales this year = $56 million

Inventory turnover = 7 times

Therefore , Inventory value of current year = $56/7 = $8 million

If annual sales ( at cost ) increases by 30%, Inventory value also has to increase by 30% to maintain the same inventory turnover ratio next year

Therefore , increase in average inventory value required = 30% of $8 = $2.4 million

INCREASE IN AVERAGE INVENTORY VALUE REQUIRED = $2.4 MILLION

Answer to question b :

Next years sales ( with 30% increase from current year) = 1.3 x $56 million = $72.8 million

Next years inventory value ( remains unchanged from current year ) = $8 million

Therefore , revised inventory turns = 72.8/8 = 9.1

Therefore , change in inventory turns = 9.1 – 7 = 2.1

CHANGE IN INVENTORY TURNS = 2.1

INCREASE IN AVERAGE INVENTORY VALUE REQUIRED = $2.4 MILLION

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