Question

Inventory Turnover and Number of Days' Sales in Inventory Kracker, Foodstuff Inc., and Winston Stores Inc. are three large grocery chains. Inventory management is an important aspect of the grocery retail business. Recent balance sheets for these three companies indicated the following merchandise inventory information: Merchandise Inventory End of Year (in millions) Beginning of Year (in millions) Kracker $3,874 $1,976 Foodstuff 3,404 3,608 Winston 3,200 6,400 The cost of goods sold for each company was: Cost of Goods Sold (in millions) Kracker $38,740 Foodstuff 37,444 Winston 32,000 a. Determine the number of days' sales in inventory for each of the three companies. Assume 365 days a year. Round all interim calculations to one decimal place. For number of days' sales in inventory, round final answers to the nearest day, and for inventory turnover, round to one decimal place. Company names Number of Days' Sales in Inventory Inventory Turnover Kracker days Foodstuff days Winston days b. If Winston had Kracker's number of days' sales in inventory, how much additional cash flow would have been generated from the smaller inventory relative to its actual average inventory position? Round interim calculations to one decimal place and your final answer to the nearest million. $ million

Answer 1

1. Inventory turnover = Cost of goods sold / Average Inventory

Kracker = 38740 / (3874+1976)/2 = 13.2

Foodstuff = 37444 / (3404+3608)/2 = 10.7

Winston = 32000 / (3200+6400)/2 = 6.7

Days Sales in inventory = 365 / Inventory turnover

Kracker = 365 / 13.2 = 28 days

Foodstuff = 365/10.7 = 34 days

Winston = 365 /6.7 = 54 days

b. Cost of goods sold = Inventory turnover of kracker x average inventory

= 13.2 *(3200+6400)/2 = 63360

additional cash flow would have been = 63360 - 32000 = $31360