Question

Suppose General Motors buys $50 million worth of tires from Goodyear in November of 2014 for use in its Chevrolet line of cars. Of these tires, $20 million are put into cars that are sold to consumers in December of 2014, and $10 million are put into cars that are produced in December but will not be sold to consumers until February of 2015. The remaining $20 million will be put into cars manufactured and sold in 2015. Describe how each of these tire-related transactions enters into inventory investment calculations in 2014 and 2015

Answer 1

Out of $50 million worth of tires bought by the General Motors in 2014, $30 million worth of tires have been used in 2014 itself.

$20 million worth oftires are used in 2015.

So, at the end of 2014, General Motors are with an inventory of tires worth $20 million.

Inventory at the end of year is referred to as closing stock.

So, With respect to 2014, $20 million worth of tires will be recorded as closing stock in the inventory investment calculations.

These $20 million worth of tires are utilized in 2015.

So, with respect to 2015, $20 million worth of tires will be recorded as opening stock in the inventory investment calculations.