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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
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B
Decrease in inventory by 50,000
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C
Decrease in cost of goods sold
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D
Increase in cost of goods sold
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Solution

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.

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