If the inventory turnover at the Farm Supplies division becomes 4, what is the potential savings in inventory carrying costs assuming a 25% carrying cost ratio?

To determine the potential savings in inventory carrying costs based on an inventory turnover of 4 and a carrying cost ratio of 25%, it's important to first understand how inventory turnover and carrying costs interact.

Inventory turnover is calculated by dividing the cost of goods sold (COGS) by the average inventory for a specific period. An inventory turnover of 4 means that the division sells its average inventory four times in a fiscal year. This signifies that the division is not holding onto inventory for extended periods, and as a result, it can significantly reduce the amount of capital that is tied up in inventory.

The carrying cost ratio is a percentage representing the cost to hold inventory, including storage, insurance, depreciation, and opportunity costs. In this case, a 25% carrying cost ratio indicates that the total carrying costs equate to one-quarter of the value of the inventory.

To calculate potential savings, you can consider the formula for savings due to improved turnover. The total savings in carrying costs is directly correlated to the reduction in the average inventory level resulting from the increased turnover rate. With an inventory turnover of 4, the division may only need to keep a quarter of what they previously held when they had a lower turnover rate.

Thus, if you assume that the