An average inventory balance of $20 million and COGS of $100 million in the latest year. If COGS in the next period is $110 million, approximately what would the average inventory balance be?

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Multiple Choice

An average inventory balance of $20 million and COGS of $100 million in the latest year. If COGS in the next period is $110 million, approximately what would the average inventory balance be?

Explanation:
The quantity being tested is how average inventory moves with changes in COGS when the inventory turnover remains roughly constant. Inventory turnover is computed as COGS divided by average inventory. Here, turnover is about 100 / 20 = 5 times per year. If COGS rises to 110 but turnover stays around 5, the new average inventory should be 110 / 5 = 22. So the approximate average inventory balance would be 22 million. The other numbers imply different turnover levels (e.g., 18 would push turnover to about 5.56, 20 would keep turnover at 5, and 24 would drop turnover to about 4.58), which isn’t consistent with a constant turnover assumption.

The quantity being tested is how average inventory moves with changes in COGS when the inventory turnover remains roughly constant. Inventory turnover is computed as COGS divided by average inventory. Here, turnover is about 100 / 20 = 5 times per year. If COGS rises to 110 but turnover stays around 5, the new average inventory should be 110 / 5 = 22. So the approximate average inventory balance would be 22 million. The other numbers imply different turnover levels (e.g., 18 would push turnover to about 5.56, 20 would keep turnover at 5, and 24 would drop turnover to about 4.58), which isn’t consistent with a constant turnover assumption.

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