What should the average inventory level be to achieve an overall inventory turnover of 5 with an annual purchase spend of $310,780,000?

To determine the average inventory level needed to achieve an inventory turnover ratio of 5 with a total annual purchase spend of $310,780,000, the relationship between these values can be analyzed.

Inventory turnover is calculated using the formula:

[ \text{Inventory Turnover} = \frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}} ]

In this context, assuming the annual purchase spend (also commonly equivalent to COGS in this scenario) is $310,780,000 and the desired inventory turnover ratio is 5, we can rearrange the formula to find the average inventory:

[ \text{Average Inventory} = \frac{\text{Cost of Goods Sold}}{\text{Inventory Turnover}} ]

Using the provided data:

[ \text{Average Inventory} = \frac{310,780,000}{5} = 62,156,000 ]

This calculated average inventory level rounds to approximately $62 million. Thus, to achieve an inventory turnover of 5 with the specified annual purchase spend, an average inventory level of about $62 million is indeed correct. This amount reflects the optimal balance between inventory on hand and the costs incurred from purchasing, enabling efficient inventory management