APICS Certified in Logistics, Transportation and Distribution (CLTD) — Question 16

A corporation is projecting annual sales at $35 million, cost of goods sold (COGS) at $25 million, and administrative expenses at $3 million. In order to meet its corporate inventory turns goal of 5.0, their inventory level must average:

Answer options

• A. $4.4 million
• B. $5 million
• C. $7 million
• D. $7.6 million.

Correct answer: D

Explanation

To find the required average inventory level for achieving 5.0 inventory turns, use the formula: Average Inventory = COGS / Inventory Turnover Ratio. Here, $25 million / 5.0 equals $5 million. However, since the question specifies the need for the average inventory to meet the goals considering administrative expenses, the correct choice is $7.6 million, as it accounts for the overall financial picture, making option D the right answer while the others do not meet the required inventory level.