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Chapter 11

Q. 11.SP.1

Jack’s Pottery Outlet has total end-of-year assets of $5 million. The first-of-the-year inventory was $375,000, with a year-end inventory of $325,000. The annual cost of goods sold was $7 million. The owner, Eric Jack, wants to evaluate his supply chain performance by measuring his percent of assets in inventory, his inventory turnover, and his weeks of supply. We use Equations (11-1), (11-2), and (11-3) to provide these measures.

Percentage invested in inventory = (Average inventory investment/Total assets) × 100            (11-1)

Inventory turnover = Cost of goods sold/Average inventory investment                 (11-2)

Weeks of supply = Average inventory investment/(Annual cost of goods sold/52 weeks)               (11-3)

Step-by-Step

Verified Solution

First, determine average inventory:
($375,000 + $325,000)/2 = $350,000

Then, use Equation (11-1) to determine percent invested in inventory:
Percent invested in inventory = (Average inventory investment/Total assets) × 100
= (350,000/5,000,000) × 100
= 7%

Third, determine inventory turnover, using Equation (11-2):
Inventory turnover = Cost of goods sold/Average inventory investment
= 7,000,000/350,000
= 20

Finally, to determine weeks of inventory, use Equation (11-3), adjusted to weeks:
Weeks of inventory = Average inventory investment/Weekly cost of goods sold
= 350,000/(7,000,000/52)
= 350,000/134,615
= 2.6

We conclude that Jack’s Pottery Outlet has 7% of its assets invested in inventory, that the inventory turnover is 20, and that weeks of supply is 2.6.