Question

Nestlé reports beginning raw materials inventory of 3,815 and ending raw materials inventory of 3,499 (both numbers in millions of Swiss francs). Assume Nestlé purchased 13,860 and used 14,176 (both amounts in millions of Swiss francs) in 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 ratio:3.88 times.
2. Day’s sales in raw material:90.10 days.

Step-by-step solution

Definition of Raw Material Inventory Turnover Ratio

A financial metric compares the raw material used by the business entity and the average value of the raw material inventory. It is compared to determine the replacement or usage frequency of the raw material inventory.

Calculation of raw material inventory turnover

$\begin{array}{c}\mathbf{Raw}\mathbf{}\mathbf{material}\mathbf{}\mathbf{inventory}\mathbf{}\mathbf{turn}\mathbf{}\mathbf{over}\mathbf{}\mathbf{ratio}\mathbf{=}\frac{\mathbf{Raw}\mathbf{}\mathbf{material}\mathbf{}\mathbf{used}}{\mathbf{Average}\mathbf{}\mathbf{raw}\mathbf{}\mathbf{material}\mathbf{}\mathbf{inventory}}\\ \mathbf{=}\frac{\mathbf{14}\mathbf{,}\mathbf{176}\mathbf{million}\mathbf{(}\mathbf{Swiss}\mathbf{}\mathbf{francs}\mathbf{)}}{\frac{\mathbf{3}\mathbf{,}\mathbf{815}\mathbf{million}\mathbf{(}\mathbf{Swiss}\mathbf{}\mathbf{francs}\mathbf{)}\mathbf{+}\mathbf{3}\mathbf{,}\mathbf{499}\mathbf{million}\mathbf{(}\mathbf{Swiss}\mathbf{}\mathbf{francs}\mathbf{)}}{\mathbf{2}}}\\ \mathbf{=}\frac{\mathbf{14}\mathbf{,}\mathbf{176}\mathbf{million}\mathbf{}\mathbf{(}\mathbf{Swiss}\mathbf{}\mathbf{francs}\mathbf{)}}{\mathbf{3}\mathbf{,}\mathbf{657}\mathbf{million}\mathbf{}\mathbf{(}\mathbf{Swiss}\mathbf{}\mathbf{francs}\mathbf{)}}\\ \mathbf{=}\mathbf{3}\mathbf{.}\mathbf{88}\mathbf{}\mathbf{times}\end{array}$

Calculation of number of day’s sales in raw material

$\begin{array}{c}\mathbf{Day}\mathbf{\text{'}}\mathbf{s}\mathbf{}\mathbf{sales}\mathbf{}\mathbf{in}\mathbf{}\mathbf{raw}\mathbf{}\mathbf{material}\mathbf{=}\frac{\mathbf{Ending}\mathbf{}\mathbf{inventory}\mathbf{}\mathbf{of}\mathbf{}\mathbf{raw}\mathbf{}\mathbf{material}}{\mathbf{Rawmaterialused}}\mathbf{\times }\mathbf{365}\\ \mathbf{=}\frac{\mathbf{3}\mathbf{,}\mathbf{499}\mathbf{million}\mathbf{(}\mathbf{Swiss}\mathbf{}\mathbf{francs}\mathbf{)}}{\mathbf{14}\mathbf{,}\mathbf{176}\mathbf{million}\mathbf{(}\mathbf{Swiss}\mathbf{}\mathbf{francs}\mathbf{)}}\mathbf{\times }\mathbf{365}\\ \mathbf{=}\mathbf{90}\mathbf{.}\mathbf{10}\mathbf{days}\end{array}$