Question

Howard's Comics, Inc. with annual sales of $8 million increases its inventory turnover from 5.5 to 6.5. How much would Howard's Comics, Inc. save annually in interest expense if the cost of carrying inventory is 7.5%?

		$7,000
		$16,783
		$60,000
		$9,208

Answer 1

The amount is computed as shown below:

Inventory when inventory turnover is 5.5 is computed as shown below:

= Sales / Inventory turnover

= $ 8,000,000 / 5.5

= $ 1,454,545.455

Inventory when inventory turnover is 6.5 is computed as shown below:

= Sales / Inventory turnover

= $ 8,000,000 / 6.5

= $ 1,230,769.231

So, the amount will be computed as follows:

= ($ 1,454,545.455 - $ 1,230,769.231) x 7.5%

= $ 16,783 Approximately

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