Question

A manufacturing company producing medical devices reported $60 million in sales over the last year. At the end of the same year, the company had $20 million worth of inventory of ready-to-ship devices. Assuming that units in inventory are valued (based on cost of goods sold) at $1000 per unit and are sold for $2000 per unit, what is the company’s annual inventory turnover?

Answer 1

If 60 million worth of goods are sold at 2000 per unit then the number of units sold are

60,000,000/2,000 = 30,000 units.

The cost of goods sold for these units are 30,000*1,000 = 30 million.

Let’s assume that the company did not replenish their inventory. This means in the beginning of the year, they had 30+20 = 50 million worth of inventory. This means they began with 50,000 units that year and ended up with 20,000 units at the end of the year in the inventory. The average inventory for the year is (50+20)/2 = 35,000 units. The cost of this inventory is 35 million.

Inventory turnover ratio is given by = cost of goods sold/average inventory = 30 million/35 million = 0.85