Assume that Zybo, Inc. has sales of $10 million and inventory of $2 million. The corporation utilizes the percent-of-sales method of financial forecasting. If Zybo is expected to generate sales of $14 million next year, what will the firm's investment in inventory be?
A) $1.4 million
B) $2.0 million
C) $2.8 million
D) None of the above

Question

Quizplus · Accepted Answer

To calculate the investment in inventory using the percent-of-sales method, we need to first calculate the inventory turnover ratio, which is the ratio of cost of goods sold to inventory.

Inventory turnover ratio = Cost of goods sold / Inventory

Assuming a constant cost of goods sold ratio, we can then use this ratio to calculate the inventory investment for the next year.

Inventory investment = Inventory turnover ratio x Sales for the next year

Given that sales for the next year are expected to be $14 million and the inventory turnover ratio is assumed to remain constant, we can calculate the inventory investment as follows:

Inventory turnover ratio = Cost of goods sold / Inventory

Cost of goods sold = Sales x Cost of goods sold ratio

Inventory turnover ratio = (Sales x Cost of goods sold ratio) / Inventory

Assuming a constant cost of goods sold ratio, we can rearrange the equation to solve for inventory:

Inventory = Sales x Cost of goods sold ratio / Inventory turnover ratio

Now, to solve for inventory, we need to estimate the cost of goods sold ratio. If we assume that this ratio is 80% (i.e. the cost of goods sold is 80% of sales), we can calculate the inventory investment as follows:

Inventory = $14 million x 80% / (10 million / 2 million)

Inventory = $11.2 million / 5

Inventory = $2.24 million

Therefore, the investment in inventory for Zybo, Inc. is expected to be $2.8 million.

Assume That Zybo, Inc