Question

REGRESSION AND INVENTORIES

Jasper Furnishings has $350 million in sales. The company expects that its sales will increase 10% this year. Jasper's CFO uses a simple linear regression to forecast the company's inventory level for a given level of projected sales. On the basis of recent history, the estimated relationship between inventories and sales (in millions of dollars) is as follows:

Inventories = $40 + 0.2(Sales)

A. Given the estimated sales forecast and the estimated relationship between inventories and sales, what are your forecasts of the company's year-end inventory level? Enter your answer in millions. For example, an answer of $25,000,000 should be entered as 25. Round your answer to two decimal places.

$ ____________ million

B. What are your forecasts of the company's year-end inventory turnover ratio? Round your answer to two decimal places.

_________

Answer 1

A. Computation of Year End Inventory Level

Regression Equation for Inventory = $40 Million + 0.20 * $350 Million * 1.1

Regression Equation for Inventory = $40 Million + $77 Million = $117 Million

B Inventory Turnover Ratio

Inventory Turnover Ratio = Sales / Average Inventory = $350 Million * 1.1 / [($117 Million + $110 Million) / 2]

Inventory Turnover Ratio = Sales / Average Inventory = $350 Million * 1.1 / $113.5 Million

Inventory Turnover Ratio = Sales / Average Inventory = 3.39