Question

Apparel Retailer) A large catalog retailer of fashion apparel reported $100,000,000 in revenues over the last year. On average, over the same year, the company had $5,000,000 worth of inventory in their warehouses. Assume that units in inventory are valued based on cost of goods sold (COGS) and that the retailer has a 100 percent markup on all products.

b. The company uses a 40 percent per year cost of inventory. That is, for the hypothetical case that one item of $100 COGS would sit exactly one year in inventory, the company charges itself a $40 inventory cost. What is the inventory cost for a $30 (COGS) item? You may assume that inventory turns are independent of the price.

Answer 1

Answer = $12 inventory cost or $1.2 per unit

Explanation

Inventory turn = COGS/inventory = $50m / $5m = 10

Per-unit inventory costs = ​Annual inventory costs/Inventory turns

= 40%/10 = 4%

So, the inventory cost per unit for a $30 (COGS) item will be = $30 × 4% = $1.2

And inventory cost is 40% of COGS therefore inventory cost for $30 will be $12 ($30 × 40%)

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