Entrepreneurship

Entrepreneurship

Grade 11

Multiple Choice

Planning inventories to achieve a ____ between too much and too little

• Below level

• Balance

• Sufficient

• Excess

Chapter 15.2: Inventory Management

Pages 362-368

Objectives

• Determine the supply you need for your business.

• Judge the calculation of industry averages

• Predict the calculation of investment inventory

Information

Determining the amount of inventory you need is a two-step process. First, you must determine the inventory, or stock, turnover rate for your business. This is the average number of times the inventory is sold out during a time period such as a year. Once you know the turnover rate, you can find the number of months’ supply to keep. You can calculate inventory turnover rate for your business in several different ways. The one you decide to use depends on the information you have available and your type of business. Stores that keep records of the retail dollar value of their stock use this method.

Inventory turnover rate

NET SALES (IN RETAIL DOLLARS) /AVERAGE INVENTORY ON HAND (IN RETAIL DOLLARS)

For example, if the total inventory for a 12-month period was valued at $870,000, the average inventory would be $72,500. If the net sales during that time period were $344,000, the inventory turnover rate would be 4.74.

$870,000/12 = 72,500

$344,000/$72500 = 4.74

This calculation shows that, on average, the inventory was sold and replaced 4.74 times in a 12-month period

Video

https://www.investopedia.com/terms/d/days-sales-inventory-dsi.asp

Open Ended

Activity 1

Total inventory for a 6-month period was valued at $520,000. Net sales for that time were $230,000. What is the inventory turnover rate?

Answer

(Average inventory is $86,667 [$520,000/6] Inventory turnover rate is 2.65. [$230,000/$86,667

Multiple Choice

How can you calculate inventory on hand if you do not have monthly inventory figures?

• Add the beginning and ending inventories for the period and divide by two.

• Subtract the beginning and ending inventories for the period and divide by two.

• Divide the beginning and ending inventories for the period and divide by two.

• Multiply the beginning and ending inventories for the period and divide by two.

Formula for inventory turnover rate

COST OF GOODS SOLD /AVERAGE INVENTORY ON HAND (AT COST)

Average Industry turnover rate

NUMBER OF UNITS SOLD /AVERAGE INVENTORY ON HAND IN UNITS

Open Ended

The restaurant average is 22. The units sold is 15000.Use the formula to calculate the industry average.

Multiple Choice

Once you know your inventory turnover rate, you can determine how many months’ __________ you should have on hand

• demand

• supply

• goods

• average

Inventory investment

For example, suppose you forecast sales for the coming year to be $100,000. Your cost of goods sold is 75 percent of sales. If you have an average inventory turnover rate of 4, you can determine your inventory investment as follows: $100,000 × 0.75/4 = $75,000/4 = $18,750

Open Ended

Suppose you forecast sales for the coming year to be $200,000. Your cost of goods sold is 85 percent of sales. If you have an average inventory turnover rate of 4, determine your inventory investment.

Multiple Choice

Why do we determine the amount of inventory to be kept on hand?

• know what remains tied up in its stock

• know just how long stocks are there in business

• know just how long its cash remains tied up in its stock

Open Ended

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