Optimum Inventory Level. Saft Corporation is considering changing its inventory policy. At present, the inventory turns over 12 times per year. Variable costs are 60 percent sales. The rate of return is 21 percent. Sales and inventory turnover data follow:
Sales ($) Turnover
800,000 12
870,000 10
950,000 7
200,000 5
Determine the inventory level that results in the greatest net savings.
A B C D E F
Average Inventory Opportunity Cost Associated with Additional Additional Net Savings
Sales ($) Turnover (A7 B) ($) Inventory($) Profitability ($) (E D) ($)
800,000 12 66,666
870,000 10 87,000 4,270 28,000 23,730
950,000 7 135,714 10,230 32,000 21,770
1,200,000 5 240,000 21,900 100,000 78,100
“ Incremental average inventory balance 0.21.
“b Incremental sales 0.40
The inventory level that results in the greatest net savings is 240,000 units.