Question

A firm has inventory turnover of 6 and cost of goods sold is Rs. 7,50,000. With better inventory management, the inventory turnover is increased to 10. This would result in:

• A. Increase in inventory by 50,000
• B. Decrease in inventory by 50,000
• C. Decrease in cost of goods sold
• D. Increase in cost of goods sold

Answer 1

The correct option is B Decrease in inventory by 50,000

Inventory turnover ratio = Cost of goods sold/Average Inventory

In the given situation:

6=750000/Average Inventory

Average Inventory= Rs.125000

If the Inventory turnover ratio increase to 10 than,

10=750000/Average Inventory

Average Inventory=Rs.75000

Therefore by increase in inventory turnover ratio, average inventory of the firm will decreases by Rs.50000.