If Spotech is able to turn their inventory over more frequently, they will have a lower average inventory and they will be able to invest the money that is no longer invested in inventory at 5%. The correct answer is 5% of the amount by which average inventory will decrease if the company is able to turn its inventory over 10 times per year instead of 8 times. This answer uses an investment rate of 10% instead of 5%.
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If Spotech is able to turn their inventory over more frequently, they will have a lower average inventory and they will be able to invest the money that is no longer invested in inventory at 5%. This answer is 0.5% of the average amount that is currently invested in inventory. The correct answer is 5% of the amount by which average inventory will decrease if the company is able to turn its inventory over 10 times per year instead of 8 times. See the correct answer for a complete explanation.
If Spotech is able to turn their inventory over more frequently, they will have a lower average inventory and they will be able to invest the money that is no longer invested in inventory at 5%. In order to answer this question, we need to calculate what the average inventory is with an inventory turnover of 8 times and what it would be if the inventory turnover were 10 times instead. Then, we can calculate how much the company could earn by investing the difference for one year at 5%. Inventory turnover is calculated as cost of sales divided by average inventory. Therefore, we can calculate average inventory by dividing cost of sales by the inventory turnover. Currently, average inventory is $16,562,500 ($132,500,000 ÷ 8). If inventory turnover increases to 10 times, the average inventory will be $13,250,000 ($132,500,000 ÷ 10). This difference of $3,312,500 will be able to be invested at 5%, earning a total of $165,625.
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