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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

REGRESSION AND INVENTORIES Jasper Furnishings has $300 million in sales. The company expects that its sales will increase 12% this year. Jasper’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 = $25 + 0.125(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:

Sales forecast is the important point that arises while making the future plans. The management generally takes 5 years financial records and then studies it and decides the amount of turnover for the current and upcoming years.

Explanation

Given information:

Sales are $300 million.

Increase in sales by 12%

Formula to calculate the sales forecast is,

Salesforecast=Sales+Increaseinsales

Substitute $300 for sales and 12% for increase in sales in the above equation.

SalesForecast=$300 million+($300 million×12%)=$300 million+$36 million=$336 million

Formula to calculate inventory given in question is,

Inventories=$25million+0.125(Sales)

Substitute $336,000,000 for sales in the above equation

Inventories=$25 million+0

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