Question

A firm’s inventory turnover of Rs. 8,00,000 is 5 times the cost of goods sold. If the inventory turnover is improved to 8 with the cost of goods sold remaining the same, a substantial amount of fund is either released from, or gets additionally invested in, inventory. Which one of the following statements is correct? 
1. Rs. 1,60,000 is released
2. Rs. 1,60,000 is additionally invested
3. Rs. 60,000 is released
4. Rs. 60,000 is additionally invested

Answer 1

Correct Answer - Option 3 : Rs. 60,000 is released

Concept:

Inventory turnover ratio is given by

Inventory turnover \( = \frac{{Cost\;of\;goods\;sold}}{{Inventory\;cost}}\)

1^st Case:

Cost of goods sold = Rs. 800,000

Inventory turnover

 = 5

Let inventory cost in 1^st case be ‘x’

\(\therefore 5 = \frac{{800,000}}{x}\)

x = 160,000

2^nd Case:

Cost of goods sold = 800,000.

Inventory turnover

 = 8

Let inventory cost in 2^nd case by ‘y’

\(\therefore 8 = \frac{{800,000}}{y}\)

y = 100,000

∴ x – y = 160000 – 100,000

Rs. 60,000 released.