Question

3M Co. reports beginning raw materials inventory of \(902 million and ending raw materials inventory of \)855 million. Assume 3M purchased \(3,646 million of raw materials and used \)3,692 million of raw materials during the year. Compute raw materials inventory turnover and the number of days’ sales in raw materials inventory.

Short answer

1. Raw material inventory turnover:4.20 times.
2. Day’s sales in raw material:84.53 days.

Step-by-step solution

Definition of Raw Material Inventory Turnover

The financial ratio that represents the frequency or the rate at which the raw material is used by the business entity or replaced is known as raw material inventory turnover. It reflects the accuracy and efficiency of the business entity in forecasting inventory usage.

Calculation of raw material inventory turnover

$\begin{array}{c}\mathbf{Raw}\mathbf{}\mathbf{material}\mathbf{}\mathbf{inventory}\mathbf{}\mathbf{turnover}\mathbf{}\mathbf{ratio}\mathbf{=}\frac{\mathbf{Raw}\mathbf{}\mathbf{material}\mathbf{}\mathbf{used}}{\mathbf{Average}\mathbf{}\mathbf{raw}\mathbf{}\mathbf{material}\mathbf{}\mathbf{inventory}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{692}\mathbf{}\mathbf{million}}{\frac{\mathbf{\$}\mathbf{902}\mathbf{}\mathbf{million}\mathbf{+}\mathbf{\$}\mathbf{855}\mathbf{}\mathbf{million}}{\mathbf{2}}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{692}\mathbf{}\mathbf{million}}{\mathbf{\$}\mathbf{878}\mathbf{.}\mathbf{5}\mathbf{}\mathbf{million}}\\ \mathbf{=}\mathbf{4}\mathbf{.}\mathbf{20}\mathbf{}\mathbf{times}\end{array}$

Number of days of sales in raw material inventory

$\begin{array}{c}\mathbf{Day}\mathbf{\text{'}}\mathbf{s}\mathbf{}\mathbf{sales}\mathbf{}\mathbf{in}\mathbf{}\mathbf{raw}\mathbf{}\mathbf{material}\mathbf{=}\frac{\mathbf{Ending}\mathbf{}\mathbf{inventory}\mathbf{}\mathbf{of}\mathbf{}\mathbf{raw}\mathbf{}\mathbf{material}}{\mathbf{Raw}\mathbf{}\mathbf{material}\mathbf{}\mathbf{used}}\mathbf{\times }\mathbf{365}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{855}\mathbf{}\mathbf{million}}{\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{692}\mathbf{}\mathbf{million}}\mathbf{\times }\mathbf{365}\\ \mathbf{=}\mathbf{84}\mathbf{.}\mathbf{53}\mathbf{days}\end{array}$