Charlie’s Cycles Inc. has $90 million in sales. The company expects that its sales will increase 8% this year. Charlie’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 = 6 + 0.1410(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? Do not round intermediate calculations. Round your answer to two decimal places.
Expected sales during the year = 90 Million + 8 % of 90 Million
= 90 Million + 7.2 Million
= $ 97.20 Million
Year-end inventory level = 6 + 0.1410 * 97.20
= 6 + 13.7052
= $ 19.7052 Million. (Rounded off to $ 19.71 million approx.)
Conclusion:- Forecasted year end inventory level of company = $ 19.71 million (approx).
inventory level of company at the beginning of year = 6 + 0.1410 * 90
= 6 + 12.69
= $ 18.69 Million.
Average inventory of company = (18.69 + 19.71) / 2
= 38.40 / 2
= $ 19.20 Million.
Inventory turnover ratio = Sales / Average inventory.
= 90 million / 19.20 million
= 4.69 times (approx)
Conclusion:- inventory turnover ratio of company = 4.69 Times (approx).