Snow Pack Corporation is the biggest snowmobile manufacturer in the world. It reported the following amounts in its financial statements (in millions): 2017 2018Net Sales Revenue $ 4,900 $ 4,360Cost of Goods Sold 4,290 3,810Average Inventory 490 440 Required:1-a. Calculate the inventory turnover ratio for 2018 and 2017.1-b. Calculate the average days to sell inventory for 2018 and 2017.2. Did inventory turnover at Snow Pack improve or decline in 2018?3. Calculate the 2018 gross profit percentage.4. The main competitor for Snow Pack is Arctic Cat. Prior to being acquired by Textron, Incorporated, Arctic Cat reported its inventory turnover was 4.6 and its gross profit percentage was 5.2 percent. Why was Arctic Cat more likely than Snow Pack to require a write-down for LCM/NRV?
Question
Snow Pack Corporation is the biggest snowmobile manufacturer in the world. It reported the following amounts in its financial statements (in millions): 2017 2018Net Sales Revenue 4,360Cost of Goods Sold 4,290 3,810Average Inventory 490 440 Required:1-a. Calculate the inventory turnover ratio for 2018 and 2017.1-b. Calculate the average days to sell inventory for 2018 and 2017.2. Did inventory turnover at Snow Pack improve or decline in 2018?3. Calculate the 2018 gross profit percentage.4. The main competitor for Snow Pack is Arctic Cat. Prior to being acquired by Textron, Incorporated, Arctic Cat reported its inventory turnover was 4.6 and its gross profit percentage was 5.2 percent. Why was Arctic Cat more likely than Snow Pack to require a write-down for LCM/NRV?
Solution
1-a. The inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory.
For 2018: Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory = 3810 / 440 = 8.66 times
For 2017: Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory = 4290 / 490 = 8.75 times
1-b. The average days to sell inventory is calculated by dividing the number of days in a year by the inventory turnover ratio.
For 2018: Average Days to Sell Inventory = 365 / Inventory Turnover Ratio = 365 / 8.66 = 42.14 days
For 2017: Average Days to Sell Inventory = 365 / Inventory Turnover Ratio = 365 / 8.75 = 41.71 days
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The inventory turnover at Snow Pack declined in 2018 as the inventory turnover ratio decreased from 8.75 in 2017 to 8.66 in 2018.
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The gross profit percentage is calculated by subtracting the cost of goods sold from net sales revenue, dividing the result by net sales revenue, and then multiplying by 100.
For 2018: Gross Profit Percentage = [(Net Sales Revenue - Cost of Goods Sold) / Net Sales Revenue] * 100 = [(4360 - 3810) / 4360] * 100 = 12.61%
- Arctic Cat was more likely than Snow Pack to require a write-down for LCM/NRV because it had a lower inventory turnover ratio and a lower gross profit percentage. A lower inventory turnover ratio indicates that Arctic Cat had a slower rate of selling its inventory, which increases the risk of inventory obsolescence. A lower gross profit percentage indicates that Arctic Cat had a smaller margin to absorb any potential losses from writing down inventory to its lower cost or market value.
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