Q:

Heartland Company’s budgeted sales and budgeted cost of goods sold for the coming year are
$144,000,000 and $99,000,000, respectively. Short-term interest rates are expected to average
10%. If Heartland can increase inventory turnover from its present level of 9 times a year to a
level of 12 times per year, compute its expected cost savings for the coming year.

A:

Cost of Goods Sold
= Inventory Turnover
Average Inventory

$99,000,000
= 9
Average Inventory

Average inventory (current) therefore equals $11,000,000 ($99,000,000 ÷ 9).

$99,000,000
= 12
Average Inventory

Average inventory (new) equals $8,250,000 ($99,000,000 ÷ 12).

$2,750,000 X 10% = $275,000 cost savings.

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