How do I calculate a future inventory figure using the cost of goods sold formulation of inventory turnover?

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A firm is planning to increase its inventory turnover by 1.5 turns next year. This year’s inventory is $40M with revenues of $850M. Revenues are expected to grow by 10% next year. The firm’s cost ratio (COGS as a percent of sales) is 40%, and is not expected to change in the near future. Calculate the inventory figure that should be included in next year’s plan. Calculate using the cost of goods sold (COGS) formulation of inventory turnover and using year-end balances only.



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One Response to 'How do I calculate a future inventory figure using the cost of goods sold formulation of inventory turnover?'

  1. Arbitrage - October 29th, 2008 at 8:07 am

    Accounting always gives me a headache.

    This is probably wrong, but it seems like you could just calculate next year’s revenue as 935M, so the COGS is 374M.

    The current inventory turnover is 340M/40M = 8.5.
    The future inventory turnover is going to be 10.

    Hence, 10 = 374M / inventory(next year).

    Inventory next year = 37.4M


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