Chapter 6, Problem 7BTN

Review the chapter’s opening feature highlighting Brad Gillis and Ben Friedman and their company, Homegrown Sustainable Sandwich Shop. Assume that Homegrown consistently maintains an inventory level of $30,000, meaning that its average and ending inventory levels are the same. Also assume its annual cost of sales is $120,000. To cut costs, Brad and Ben propose to slash inventory to a constant level of $15,000 with no impact on cost of sales. They plan to work with suppliers to get quicker deliveries and to order smaller quantities more often.

Required

1. Compute the company’s inventory turnover and its days’ sales in inventory under (a) current conditions and (b) proposed conditions.

2. Evaluate and comment on the merits of their proposal given your analysis for part 1. Identify any concerns you might have about the proposal.