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 $49 million. During the year, the inventory of accessories turned over sevenseven times. For the next year, Cyberphone plans to increase annual sales (at cost) by 17 percent.

a. What is the increase in the average aggregate inventory value required if Cyberphone maintains the same inventory turnover during the next year? $ nothing. (Enter 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? nothing turns. (Enter your response rounded to one decimal place.)

Explanation / Answer

This Year

COGS   = X

Inventory Turnover = 7

AAVI0    = X/7

AAVI – Average Aggregate Inventory Value, COGS – Cost of Goods Sold          

Next Year

COGS   = 1.17X

Inventory Turnover = 7

AAVI1    = 1.17X / 7

Increase in AAVI = (AAVI1 – AAVI0) / AAVI0 = (1.17X / 7 - X/7) / (X/7) = 0.17 = 17%

(b)

If Cyberphone wants no change in AAVI in the next year, then it needs to increase the Inventory turnover by 17% (As obvious from the AAVI equation, numerator increased by 17%, so denominator also as to increase by 17%, so that resulting AAVI remains same). So Inventory turnover objective for next year will be 7 * (1+17%) = 8.2

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