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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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REGRESSION AND INVENTORIES Charlie’s Cycles Inc. has $110 million in sales. The company expects that its sales will increase 5% 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 = $ 9 + 0.0875 ( Sales )

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 and its inventory turnover ratio?

Summary Introduction

To compute: The sales forecast, year ended inventory and the inventory turnover ratio.

Introduction:

Sales Forecast:

The management generally takes five years financial records and then studies it and decides the amount of turnover for the current and upcoming years. This predicted turnover is known as the sales forecast.

Explanation

Given information:

Sales are $110million.

Increase in sales is by 5%.

Formula to calculate the sales forecast is,

Salesforecast=Sales+(Sales×Percentage of increase in sales)

Substitute $110 for sales and increase in sales is 5%.

SalesForecast=$110,000,000+($110,000,000×5%)=$110,000,000+$5,500,000=$115,500,000

Formula to calculate inventory is,

Inventories=$9million+0.0875(Sales)

Substitute $115,500,000 for sales

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